(Bloomberg) — Currencies across emerging markets dipped as traders grew cautious over a strengthening dollar and amid lingering concern about the health of China’s economy.
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The MSCI emerging-market currency index fell 0.1% Tuesday, after economic data from the US on durable goods orders came in stronger than expected. While the offshore yuan strengthened after the PBOC set a strong reference rate, it failed to trigger a broader rally.
“The strong People’s Bank of China fix for CNY helped stabilize sentiment on EM FX early, but the dollar is starting to recover and that’s weighing on EM currencies now,” said Win Thin, strategist at Brown Brothers Harriman. “The mood is very cautious.”
Investors in emerging markets are waiting for the start of the Federal Reserve’s rate-cut cycle to see how the dollar and Treasury yields will fare. Analysts at Barclays expect higher-carry emerging markets to trade well for now, given expectations of lower US rates. But longer-term, a shallower US easing cycle will inevitably weigh on EM assets, they predict, noting still-tight spreads to US rates.
“Monetary authorities will eventually have to weigh the trade-offs between a looser monetary policy stance and weaker exchange rates, as currencies tend to weaken as spreads tighten,” Barclays analyst Themistoklis Fiotakis said in a note to clients.
Latin American currencies were mostly down, with the Peruvian sol, Chilean peso and Brazilian real leading losses. Peru’s currency sank on concern over the potential impact of pension withdrawals from privately-administered funds, while the Chilean peso was dragged lower once again by low carry and high volatility.
The Brazilian real weakened against the greenback in a session marked by central bank minutes, in which policymakers discussed the possibility of smaller interest rate cuts ahead, and a separate release showing that annual inflation slowed less than expected in early March, to 4.14%.
On the green side, the Colombian peso was the best performing major currency in the world Tuesday as trading resumed after a long weekend following the central bank’s rate decision on Friday. The bank accelerated its easing cycle, but rejected calls from two policymakers for an even deeper cut.
Across Europe, the Hungarian forint gained and is one of the best performers among peers after the National Bank of Hungary reduced its benchmark interest rate by 75 basis points to 8.25%. During a briefing, Deputy Governor Barnabas Virag said that the nation’s monetary policy is entering a “new phase” with rising risks that warrant a further slowing of its monetary-easing cycle.
Nigeria’s central bank also raised interest rates Tuesday, lifting them for the second time in a matter of weeks, as it steps up its battle to curb inflation and sustain a recovery in the nation’s battered currency.
In the world of equities, emerging markets stocks gained 0.3% in tandem with global markets as US equities rebounded after a two-day pullback.
Sri Lanka on the other hand unexpectedly renewed its monetary easing cycle to support a rebound in the economy after inflation eased for the first time in five months. Its dollar bonds led gains in an index of developing and frontier sovereign hard currency bonds.
Senegal’s bonds rallied for a second day, posting the best performance among sovereign dollar-debt issuers in emerging markets, after Bassirou Diomaye Faye clinched victory in the race for the presidency.
–With assistance from Colleen Goko.
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