Janice R. Andrews
Thanks to a noteworthy increase in Brazil’s real, emerging-market currencies are poised to see their largest weekly gains of 2024. This surge coincides with conjecture that the central bank of Brazil may hike interest rates in the latter part of this year. With a 0.4% gain, the MSCI Emerging Markets (EM) currency index saw its second day of advances in a row and hit its highest level in two years. In tandem with this, stocks in emerging nations had a 1.6% increase after seeing a significant drop earlier in the week.
Fears of a probable hard landing in the U.S. economy have caused markets to experience tremendous volatility, resulting in a turbulent global financial landscape. Some of these worries have been allayed, though, by a declining dollar and a rise in international equities. The recent labour statistics out of the United States has been crucial in calming the markets, as concerns about an imminent recession in the country seem exaggerated.
JPMorgan Chase & Co. strategist Saad Siddiqui emphasised the continued volatility in emerging-market currencies, especially in light of the approaching US election. Siddiqui said in a podcast on Friday that “the recession fears here look overdone,” but he also warned that the currency markets will probably continue to be erratic in the days leading up to the election.
With almost a 4% rise, the real, the currency of Brazil, has been an exceptional performer and is expected to have its best week since late 2022. Following indications from Brazilian officials that they would raise interest rates later this year, there has been a spike in demand. In contrast, despite worries about stubbornly high core inflation, Peru’s central bank unexpectedly lowered its benchmark interest rate on Thursday. This action came after Mexico decided to also reduce the cost of borrowing.
In contrast, because Colombian inflation dropped faster than expected, the peso trailed both the real and the peso of Chile. Expectations of even more dramatic rate cuts in the Andean nation have been raised by this event.
Even if carry trades were unwound globally this week, emerging-market currencies have been remarkably resilient. A weaker dollar was a result of the rising Japanese yen, which may have diverted money into riskier markets. Phoenix Kalen and other Societe Generale SA strategists highlighted that emerging-market currencies, bonds, and rates would be supported by the decline in the yield and carry of long U.S. dollar positions.
Bloomberg Intelligence’s top Asian FX strategist, Stephen Chiu, said that emerging-market currencies will keep rising against the US dollar as the market braces itself for an expected rate drop by the Federal Reserve and the continuous unwinding of carry trades. “Low carry EM currencies are likely to outperform higher-yielding ones,” Chiu stated.
The demand on central banks in developing countries to protect their currencies has decreased as growing predictions of a Federal Reserve rate drop weigh on the dollar. This year, authorities from nations like Indonesia and India have entered the market to support their respective currencies.
With the exception of any unexpectedly hawkish statements from officials or unexpectedly strong U.S. economic data, these gains should hold until the next Federal Reserve rate decision.
