Emerging-Market Currencies Rebound as Dollar, US Yields Retreat

Mpho Hlakudi and Maria Elena Vizcaino
3 min read
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(Bloomberg) -- A gauge of emerging-market currencies advanced Friday as risk appetite grew across foreign-exchange markets with the greenback and US yields retreating.

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South Africa’s rand and the Philippines peso were the top gainers with the dollar slipping as the People’s Bank of China disclosed more details of its measures to boost capital markets. The Mexican peso weakened, extending its worst weekly plunge since August.

The gains chipped away at an otherwise rough week for developing-world currencies. But strategists are warning the relief may be short-lived. A flurry of factors that propelled the greenback still loom, including the prospect of Donald Trump’s return to the White House, data that points to a resilient US economy and lackluster China stimulus measures.

“There will likely be a broad aversion towards EM given Trump risks, but some currencies may enjoy offsetting factors that allow them to outperform” said Juan Manuel Herrera Betancourt, a strategist at Scotiabank in London. “Were optimism around Chinese stimulus to improve, we would likely see a boost from metals prices to the Peruvian sol and Chilean peso.”

One-month implied volatility for emerging-market currencies rose for a fourth week, the longest streak since August.

Citigroup strategists including Luis Costa said emerging currencies could become more vulnerable around the time of the election, particularly as rate cuts in many emerging markets have eroded their real yield cushion against developed-market peers.

Latin American currencies, which had been some of investors’ favorite to pick up higher yields, were hit particularly hard this week. Even as prices of iron ore and copper recovered Friday following China’s central bank announcement, currencies from Brazil and Chile sank more than their peers.

The Brazilian real traded at the lowest level in over two months versus the dollar as traders brush off government plans to contain fiscal spending. Chile’s peso, meantime, continued its free-fall, despite higher copper prices, after the central bank cut rates and signaled further reductions to come as the economy struggles to gain traction.

The Mexican peso, meantime, sank 3.1% this week, the worst performance since August. It briefly weakened past the 20-per-dollar level Thursday, and ended the Friday session just shy of that at 19.88.

“Markets are taking that as maybe MXN is oversold from a technical perspective and valuations are somewhat attractive to reengage with the peso,” said Brendan McKenna, a strategist at Wells Fargo in New York.

Bonds

The global risk-on mood helped dollar notes from high-yield countries, including Ecuador, Ukraine and Argentina. Investment-grade peers from Indonesia to the Philippines and South Korea underperformed.

Elsewhere in credit markets, dollar bonds from crisis-ridden Bolivia have soared to the highest in a year as KNG Securities turned positive on the notes and former president Evo Morales faced legal challenges, reducing his chances of returning to power. Panama is getting a $1 billion loan from JPMorgan Chase & Co., and the interest rate can adjust if the country issues more debt or gets a credit-rating downgrade.

Stocks

A rally in Asian stocks fueled a rebound in the MSCI index for developing world equities. Chinese stocks gained on stimulus hopes and Taiwan Semiconductor shares advanced following strong results.

The People’s Bank of China launched a specialized re-lending facility for share buybacks, while data showed China’s economy slowed in the third quarter, though less than expected. The nation’s equities have struggled, entering correction territory this week, as investors await details of promised stimulus.

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