September 21, 2018 / 9:51 AM / 3 months ago

EMERGING MARKETS-Recovery grows strong, Hong Kong dollar goes wild

* Biggest jump for China bluechip stocks in over 2 years

* Rand leads the charge for EM currencies as finmin lays out plan

* Rouble another winner for the week by lira struggling again

* Yuan makes rare weekly gain vs dollar but at 3-year low vs euro

* Local FX bond yields drift lower

By Marc Jones

LONDON, Sept 21 (Reuters) - Emerging markets extended their recovery on Friday, as what looked set to be a marquee week for South Africa’s rand and the best day for Chinese stocks in over two years helped sweep away some of the recent gloom.

The day’s surprise came from the closely-controlled Hong Kong dollar which saw its biggest spike since 2003 overnight and a frenzy of activity options market in the process.

Traders couldn’t entirely explain the move, although some pointed to a rise in local money market rates as evidence that domestic banks might raise their lending rates next week, in reaction to another possible rate rise by the U.S. Federal Reserve.

Other possibilities included upcoming public holidays and an announcement by China’s central bank that it will start issuing its bills in the former British colony which stoked speculation about a reduction in offshore yuan supplies.

The big picture though was of broad-based healing as a weakening of the dollar, defensive moves from EM central banks and steadier global bond yields help offset the escalating trade war between China and the United States.

China’s CSI300 index rose 3 percent in its best day since May 2016 in Asia and capped what was set to be the fourth week of gains in five for MSCI’s 24-country emerging market index.

At the same time, JP Morgan’s gauge of emerging market currencies was at its highest in almost a month.

“The dollar weakness helps a lot,” said Saxo Bank’s head of FX strategy John Hardy.

“It seems to be a relief rally so far and it could extend a bit,” although he also reckoned a renewed push higher in U.S. interest rates — which set the bar for global borrowing costs — could easily snuff the rebound out.

This week’s FX charge has been led by South Africa’s rand which at 14.21 per dollar was clocking a near 5 percent weekly rise which is its best since April 2016.

It came too as the country’s president Cyril Ramaphosa laid out a raft of policy reform plans but fell short of announcing a stimulus package, saying there was no room to increase spending or borrowing.

“We have to resort to re-prioritising our budget and our spending,” Ramaphosa said in Pretoria.

Russia’s rouble was also on course for an impressive week for a second week running, but Turkey’s lira, which has been the main lightening rod for EM nervousness this year, wasn’t.

Finance Minister Berat Albayrak had sketched out his new economic strategy on Thursday but it proved too light on detail for many investors and the lira was last down 1.5 percent at 6.27 against the dollar in Istanbul and down for the week too.

China’s yuan < CNY=CFXS> is the other big focal point for investors who are wary that it could be used as a weapon in the trade rift with the United States.

While all the attention has been on the yuan’s level against the dollar — it was set for a rare weekly gains against the U.S. currency — it has quietly slipped to a 3-year low against the euro.

Rating agency S&P Global also said on Friday it had maintained China’s ‘A+/A-1’ stable credit rating, citing that Beijing was likely to maintain growth and improve fiscal performance in the next three to four years.

For GRAPHIC on emerging market FX performance 2018, see tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance 2018, see tmsnrt.rs/2OusNdX

For TOP NEWS across emerging markets

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see)

Reporting by Marc Jones; Editing by Toby Chopra

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