(Bloomberg) — Most emerging-market currencies weakened after strong US payrolls data cooled bets on another big cut by the Federal Reserve and cast a pall over risk assets.
MSCI’s index for developing world currencies fell as much as 0.5% on the data, though end-of day adjustments left it just 0.1% lower. The Korean won led losses, followed by Eastern European currencies. Latin American currencies, meanwhile, mostly gained Friday as the figures eased fears of a recession that would hit growth in the region.
US job growth last month topped all estimates, backing bets that the Fed will moderate the pace of its cuts after last month’s half-point move. Such a scenario is set to mute flows into emerging markets, said Marco Oviedo, a strategist at Sao Paulo-based XP Investimentos. After the “big upside surprise,” JPMorgan Chase & Co. abandoned an overweight position it put on emerging-market local bonds just last month.
“We could expect a more cautious Fed, since the labor markets seems to show some solid evolution toward a soft landing,” Oviedo said. “Currencies with certain carry could remain attractive, but I do not see a rally.”
The MSCI EM currency gauge ended the week 0.5% lower, the worst such span since January. Asian currencies that were already closed when the US data came out were set for losses Monday morning, with one-month non-deliverable forwards for the Indonesian rupiah, Thai baht and Philippine peso all weaker.
Emerging market stocks, meanwhile, clocked their fourth straight week of gains amid a rally in Chinese equities following a stream of stimulus measures. Investors have been piling into exchange-traded funds stuffed with Chinese stocks. The $7.8 billion iShares China Large-Cap ETF, known by its ticker FXI, saw over $1.4 billion in inflows on Thursday, more than double the previous record cash infusion in the fund’s 20-year lifetime.
Colombia, Mexico
Mexico’s peso gained on diminishing prospects for a sharp US economic downturn that would batter the local economy. Mexico’s currency has bucked losses across emerging market currencies this week, gaining around 2% as it traded more like a dollar proxy.
The investor-friendly tone of President Claudia Sheinbaum, who took office this week, also helped support the peso, while one-month implied volatility surged to above 19% as traders gear up for wild swings around the US presidential election next month.
Investors also continue to watch for developments of the Middle East conflict, which could widen and potentially disrupt global energy shipments. Colombia’s peso advanced as oil prices rose a sixth straight day.
Credit
JPMorgan strategists said Friday’s jobs data likely closed a window to buy emerging market debt ahead of the US vote. An index of EM local bonds posted its biggest quarterly advance since 2020 during the third quarter on prospects that Fed cuts would entice flows from yield-hungry investors.
Panama’s dollar bonds sank after some traders thought a recent rally had gone too far, too fast amid hopes the country’s finance minister will be able to implement budget cuts and avert the loss of the country’s investment grade rating.
–With assistance from Carolina Wilson and Vinícius Andrade.
©2024 Bloomberg L.P.
