Russian rouble rises after surprise rate hike; EM stocks suffer

The Russian rouble hit session highs after a surprise interest rate hike on Friday, as the country joined Turkey and Brazil in delivering a central bank bonanza for their currencies this week.

The Bank of Russia raised the key interest rate by 25 basis points to 4.5% amid inflationary and geopolitical risks and signalled more rate increases would follow. A Reuters poll on Monday had expected the bank to stand pat on rate and prepare for an upcoming hike.

The rouble rose nearly 1% on Friday, breaking a three-day losing streak. Still, the currency is seen ending the week lower as a report alleging Russian involvement in the US 2020 election heightened tension between the two nations with Washington expected to impose sanction on Moscow as early as next week.

"The market had priced in a lot, probably the central bank didn't want to be behind the curve," said Aberdeen Standard Investments' EM portfolio manager, Viktor Szabo, who had expected the bank to wait another month.

"The market is so aggressive (in pricing rate hikes across EM) at the moment that it is difficult to ignore, because if you do ignore it, the market could put pressure on your FX," he added, highlighting Turkey and Brazil delivering bigger-than-expected rate hikes this week.

Turkey's 200 basis points hike to 19% on Thursday, sent the lira surging, putting it back in positive territory for the year. It was last trading at 7.239 to the dollar.

The moves are in contrast to the US Federal Reserve's dovish stance, the reiteration of which boosted appetite for risker currencies this week, putting an index of EM currencies on pace to end a four-week losing streak.

Low US interest rates increase interest rate differentials, making high-yielding currencies more appealing for carry trades.

Developing market stocks, meanwhile, lost 1% on Friday, tipping the benchmark index into the red for the week.

After a sharp sell-off on Wall Street on a bond yield spike, downbeat sentiment was exacerbated by the first high-level US-China talks of the Biden administration starting on a fiery note.

"The tone will raise investor fears that US-China relations are likely to remain tense over the coming years, in spite of the change in administration in the United States," said Deutsche Bank strategists in a note.

Geopolitical tensions and a consequent trade war between the two nations under former US President Donald Trump's administration had hammered financial markets and contributed to a slowdown in global growth.