Sharp gains in emerging-market currencies this week mark a sudden reversal from just days ago, when investors were convinced these currencies only had one way to go: down.
Investors rushing to cover those one-way bets drove gains on Wednesday in Indonesia’s rupiah, which logged its biggest one-day rise in seven years, and Malaysia’s ringgit. The moves add steam to a rally that began Monday and has spread across other emerging-market currencies.
This week, Indonesia’s rupiah is up over 6%, the Malaysia’s ringgit is up about 4.5% and Russia’s ruble is up over 6%.
On Wednesday, Indonesia’s rupiah touched 13,700 against the U.S. dollar, gaining as much as 3.95%, while Malaysia’s ringgit touched 4.16 against the U.S. dollar, rising as much as 5.1%.
In a bid to stem their currencies’ incessant slide, Indonesia’s central bank spent $3.6 billion in August while Malaysia’s spent $2 billion in the two weeks through Sept. 30, data Wednesday also showed.
For much of the year, concerns about tighter U.S. monetary policy and slowing Chinese growth framed investors’ pessimism about emerging markets.
In the past few days, evidence of a fragile recovery in developed markets—principally disappointing U.S. employment data—and a slight improvement in a gauge of Chinese manufacturing put both concerns on the back burner. The optimism drove investors to pare their one-way bets, for now.
Still, the same factors that have haunted emerging markets this year lurk. On Tuesday, the International Monetary Fund again downgraded its global-growth outlook based on a deepening slowdown in emerging markets and warned of rising risks of a global recession.
That’s why the rupiah’s rally has “no basis in economic data, but is entirely driven by bargain-hunters and short sellers being squeezed out,” said Kit Juckes, a London-based macro strategist at Société Générale in a note. The latest moves in emerging-market currencies follow large drops in their values, he added.
Wagers against some of the most vulnerable emerging market currencies like the Indonesian rupiah and Malaysian ringgit have sent them tumbling over 15% since the start of the year.
Emerging-market currencies have become among the most widely traded currencies in recent months. Wagering against the rupiah, for example, has been a popular trade given the currency’s persistent slide. But it can also be an expensive trade to hold if the rupiah doesn’t depreciate fast enough, investors and traders say.
“There are still a number of factors in the background that are likely to weigh on emerging market assets,” said Mitul Kotecha, head of foreign exchange strategy at Barclays in Singapore. “I don’t think this is the beginning of a fresh trend,” he said, adding that there hasn’t been much positive economic data “that justifies this.”
Others say shifting expectations about the longevity of loose-money policies from the world’s major central banks have taken some of the pressure off emerging market economies. In Asia, central banks including Taiwan and India have taken steps to loosen monetary policy recently.
Signs that emerging market governments are finally taking steps boost their economies also has helped allay investors’ frustrations: Brazil is set to shake up its cabinet while Indonesia has introduced several economic stimulus measures.