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Prospects Daily: Developing-country currencies gain against dollar, OECD leading index remains stable in May, Brazil’s consumer price inflation rises further in June

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Financial Markets

Currencies in Indonesia, Malaysia, and South Africa advanced versus the dollar on Tuesday as intensifying search for yield among global investors boosted demand for high-yielding emerging-market currencies. Indonesia’s rupiah climbed against the greenback to as high as 11, 605 amid positive election expectations, the strongest level since May 30; while Malaysia’s ringgit climbed to the strongest level since November 01 amid prospects of higher interest rates. South Africa’s rand strengthened 0.7% to 10.7073 per dollar after climbing as much as 1.0%.

India’s benchmark stock index, Sensex, slumped the most in five months, led by the country’s market leading companies, as investors speculated the current high valuations of the country’s stocks are unsustainable. Profit taking by some investors following a record rally also weighed on stock prices. The Sensex dropped 2.0% at today’s closing, posting the worst performance among Asian benchmark stock indexes. Meanwhile, the gauge has gained 21.0% this year, becoming the best performer among the world’s 10 largest stock markets, and it has increased its market valuations by $206 billion since the election in May.

High Income Economies

The Organization for Economic Cooperation and Development (OECD) composite leading indicators (CLIs) for member countries, designed to anticipate turning points in economic activity relative to trend, remained unchanged at 100.6 in May. Among the individual member economies, the U.S. CLIs continue to indicate stable growth momentum with the index rising to 100.6 from 100.5 in April. The Eurozone CLIs continue to indicate a positive change in momentum with the index coming in at 101.1, unchanged from April. Possibly pointing to an interruption in the growth momentum, the Japanese index fell to 100.4 from 100.7.

U.K. industrial production fell 0.7% (m/m) in May, the largest decline since last August, more than reversing a revised 0.3% rise in April. The decline was unexpected as production was forecast by economists to grow 0.3%. Manufacturing output declined 1.3%, the sharpest since January 2013, versus April's 0.3% increase. On the other hand, electricity output grew 3.8% and oil and gas extraction rose 0.9%. Mining and quarrying recovered in May, rising 0.8%. The latest disappointing reading will likely be seen as supportive to the Bank of England to hold raising interest rates until 2015.

Developing Economies

Europe and Central Asia

Turkey’s industrial production rose a seasonally-and-calendar adjusted 3.3% (y/y) in May, slowing more than expected from a 4.6% (y/y) expansion in April. Economists’ forecast was for industrial production to expand at a 4.0% (y/y) pace in May. Month-on-month, industrial production decreased by a seasonally-and-calendar adjusted 1.0%, the biggest decline since October 2013 when industrial production fell 2.9%, reversing April’s 1.0% growth, as mining and quarrying output and manufacturing production fell.

Latin America and Caribbean

Brazil’s annual consumer price inflation rose 6.52% in June, reaching the upper limit of the central bank’s target range for 2014, accelerating from 6.37% in May. On a monthly basis consumer prices rose 0.40% in June, broadly in line with economists’ forecast, and slowing slightly from 0.46% in May as prices of food and beverages fell.

Sub-Saharan Africa

South Africa’s business confidence improved in June after falling sharply in May. The business confidence index rose to 89.7 in June up from 88.9 in May, but remained well below April’s reading of 92.6, its highest score since February 2013. Seven of the 13 components of the index contributed negatively to the June reading, whereas negative contributions came from four components in May, reflecting new labor disputes in the metal industry and businesses’ concerns about government policies.

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