(Bloomberg) — Emerging-market currencies are set to clock their biggest weekly gains of 2024, led by a rise in Brazil’s real on expectations its central bank could raise interest rates later this year.
The MSCI EM currency index rose 0.4%, gaining for a second day and hitting its highest level in two years. Developing-nation stocks rose 1.6% as they climbed back from Monday’s rout.
A weaker dollar and a rebound in global equities boosted risk appetite after global markets whipsawed this week amid fears of a hard landing in the US. The latest US labor data helped quell those concerns.
“The recession fears here look overdone,” JPMorgan Chase & Co. strategist Saad Siddiqui said in a podcast Friday while warning that volatility in emerging market currencies will remain high with the US election approaching.
The Brazilian currency was on track to post it best week since late 2022 with a nearly 4% gain after policymakers insisted they could be raising interest rates later this year.
Peru’s central bank unexpectedly cut its benchmark interest rate Thursday, shrugging off concern that core inflation remains stubbornly high, following Mexico’s move to also lower borrowing costs.
Colombia’s peso lagged the real and Chile’s peso after inflation in the Andean nation slowed more than expected, bolstering expectations for even more aggressive rate cuts.
Even as a global unwinding of carry trades took hold this week, emerging-market currencies showed resilience as a stronger Japanese yen also meant a weaker dollar, with its potential to channel flows into riskier assets. The erosion in the yield and carry of long US-dollar positions will support EM currencies, bonds and rates, Societe Generale SA strategists including Phoenix Kalen wrote in a note Friday.
“As the market continues to position for the upcoming Fed cut and the continued unwind of carry trade, EM currencies would rise against the dollar, with low carry EM currencies to outperform the higher yielding ones,” said Stephen Chiu, chief Asian FX strategist at Bloomberg Intelligence.
Growing bets that the Federal Reserve will cut interest rates in the coming months are weighing on the dollar, easing pressure on central banks in developing nations to defend their currencies. Authorities in nations from India to Indonesia have intervened in the market to prop up their currencies this year.
The gains should continue till the next Fed rate decision unless officials push back with a more hawkish tone in the coming days or US economic data throw up any upside surprises, according to Chiu.
In stock trading, shares in Taiwan Semiconductor Manufacturing Co.’s rose after its revenues in July surged 45%.
Shares in Turkish banks posted their biggest weekly drop in more than a year, as the prospect of high-for-longer interest rates prompted investors to take profit off the sector’s massive rally in favor of non-financial stocks.
©2024 Bloomberg L.P.
