Currencies Miss Out on First Quarter Rally for Emerging Assets

(Bloomberg) — Emerging-market currencies fell for a second day Thursday, closing at the lowest level in more than two months amid light trading ahead of the Easter holiday in the Americas and the end of the quarter.

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The Mexican peso and Brazilian real led currencies lower, with the real weakening past the 5-per-dollar level. Colombia, Argentina and Peru markets are already shuttered for Easter.

“With the rest of Latin America closed, the pressure fell on those currencies that have some liquidity,” said Erick Martinez, a strategist at Barclays in New York.

Traders remained cautious ahead of US inflation data on Friday. The latest remarks by Federal Reserve officials reinforced bets policymakers will be in no rush to cut interest rates.

Though the main gauge for emerging-market stocks climbed, the sub-index for Latin America slid as appetite for riskier assets in global markets cooled during the US session.

Currencies posted a 1% loss for the quarter, while the greenback soared three times as much. Mexico’s peso, supported by record high interest rates, political stability and the so-called nearshoring trend, is the best-performing currency out of 23 peers tracked by Bloomberg, strengthening over 2% in the last three months.

“What’s not to like about a currency like the MXN?” Brad Bechtel, head of foreign-exchange at Jefferies wrote in a note, citing a “good” macro story, high real rates and low volatility.

Bond Stars

Panama bonds slumped Thursday after Fitch Ratings downgraded the Central American country into junk for the first time since 2010, citing fiscal and governance challenges.

Still, the bond market in general is closing the quarter brimming with turnaround stories as investors walk away with hefty rewards from some of the world’s most vulnerable economies.

Dollar bonds from serial defaulters Ecuador and Argentina handed off the biggest returns in the last three months, as governments stepped up policy reforms. Egypt’s debt also posted eye-popping gains as the nation struck an agreement with the International Monetary Fund and won billions in dollar flows. Meantime, Zambia reached an agreement with holders of its Eurbonds, while defaulted debt from Sri Lanka and Ghana soared as the countries made progress in talks with creditors.

The push was such that the extra yield investors demand to hold emerging-market dollar bonds over similar US Treasuries shrank to the lowest in over two years. Access to capital markets returned to previously troubled nations such as Kenya, after Ivory Coast ended the dry spell for hard-currency bond sales in sub-Saharan Africa that lasted for almost two years.

Some of those one-off stories also helped the nations’ stock markets to outperform, boosting the broad gauge despite a pull-away from Chinese equities as geopolitical and policy risks escalated.

The star of the quarter was Taiwan Semiconductor Manufacturing Co., which accounted for most of the gains in the MSCI gauge amid demand for companies seen as riding the artificial-intelligence wave.

–With assistance from Srinivasan Sivabalan.

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