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EMERGING MARKETS-Currencies get reprieve as policymakers offer support

Walter Brandimarte and Natsuko Waki
Thursday, 30 Jan 2014 | 1:31 PM ET

RIO DE JANEIRO/LONDON, Jan 30 (Reuters) - Emerging markets recovered on Thursday from a sharp selloff as Latin American stocks and currencies gained and Russia's ruble and Turkey's lira rebounded after policymakers pledged to take any necessary measures to stabilize their markets, though investors worried the respite would be short-lived. Traders said recent panic selling had abated for now as markets priced in the current pace of stimulus withdrawal by the U.S. Federal Reserve. The Fed on Wednesday said it would cut its monthly bond purchases by another $10 billion, and a Reuters poll on Thursday showed that economists expect the Fed to maintain the pace of the taper throughout this year. China's economic slowdown, however, left investors walking on egg shells after an index of business conditions for Chinese manufacturers dipped for the first time in six months in January. Many emerging countries, including Brazil and Chile, greatly rely on commodities exports to China, which makes their currencies vulnerable to further losses should China, the world's second largest economy, disappoint forecasts.

"China risk has risen, and U.S. Treasury yields have fallen" since the beginning of the year, David Lubin, chief emerging market economist at Citi, wrote in a research note. "The net effect is to create a reminder that weak emerging markets still face a rather hostile environment for their exports." Citi forecast real exchange rates to rise further in weak developing countries with "unfinanceable current account deficits" in order to cool down domestic consumption and imports. Turkey and South Africa were among countries that hiked interest rates this week, with only an initial limited impact on investor sentiment. Currencies eventually steadied on Thursday as central banks from Istanbul to Moscow and Brasilia took new measures or stepped up verbal intervention to shore up their markets. The ruble came off a record low against the euro and its lowest level in nearly five years against the dollar after the Russian central bank said it would make unlimited interventions if the exchange rate strays outside of its target corridor. A Reuters poll of economists found that the Russian currency is expected to firm by mid-year to 34 per dollar after some short-term turbulence. It last traded at 34.80 per dollar, 0.8 percent stronger on the day. The lira rose 0.6 percent after the Turkish central bank said it may further tighten liquidity if necessary after massively raising all its interest rates late on Wednesday. Romania's leu climbed 0.3 percent against the euro after the country's central bank intervened indirectly in the market. Even in India, whose currency has not sold off as much as its peers, policymakers pledged to take all necessary steps to ensure stability in the country's financial markets.

RELIEF IN LATAM MARKETS On the other side of the Atlantic, the Brazilian real gained 0.8 percent after the central bank announced it would auction $2.3 billion on the spot market on Friday through repurchase agreements. The offer, which is intended to roll over similar dollar lines that expire next month, underscores Brazil's commitment to supporting liquidity in its foreign exchange market. Other Latin American currencies were also in the black, with the Mexican peso gaining 0.7 percent and the Chilean peso 0.3 percent stronger. A benchmark MSCI index of emerging market stocks erased losses after earlier hitting a 4-1/2-month low. The Latin American portion of the index gained 1 percent. The recent emerging markets rout had gained traction as many investors deemed returns too low given the outlook for higher U.S. Treasuries yields. Much of the outflows was triggered by retail investors, who are usually more averse to short-term volatility. "Institutional investors have remained faithful, (but) it may be that some of these positions are starting to crack," said Manik Narain, emerging market strategist at UBS.

Key Latin American stock indexes and currencies at 1720 GMT

Stock indexes daily % YTD % Latest change change MSCI LatAm 2,904.70 1.07 -10.21 Brazil Bovespa 47,637.96 0.17 -7.51 Mexico IPC 40,862.59 0.42 -4.36 Chile IPSA 3,419.47 0.77 -7.56 Chile IGPA 17,048.95 0.66 -6.46 Argentina MerVal 5,726.45 1.18 6.22 Colombia IGBC 12,006.50 0.48 -8.15 Peru IGRA 15,399.21 0.02 -2.25 Venezuela IBC 2,798.44 0.05 2.26 Currencies daily % YTD % change change

Latest

Brazil real 2.4120 0.85 -2.29 Mexico peso 13.3170 0.66 -2.16 Chile peso 547.1000 0.35 -3.84 Colombia peso 2007.5000 -0.02 -3.76 Peru sol 2.8150 0.25 -0.78 Argentina peso 8.0175 -0.16 -19.02 Argentina peso 12.6700 2.21 -21.07

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