Emerging Currencies Drop as EU Elections Add to Political Risks

(Bloomberg) -- Most emerging-market currencies weakened versus the greenback Monday and a gauge of volatility climbed as political risk took center stage following the advance of the far right in European elections.

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The Hungarian forint was one of the biggest losers of the session against both the dollar and the euro after a crushing defeat in the European Parliament vote led French President Emmanuel Macron to call an early election for congress. The Czech koruna, Romanian leu and Polish zloty also lagged peers, weighed down by a weaker euro.

Politics is increasingly becoming a threat to emerging-market assets in a year in which 40 countries are holding national votes. Recent elections in Mexico, South Africa and India saw the countries’ assets tumble after unexpected results.

“Elections didn’t go as planned, spooking markets and raising uncertainty,” wrote TD securities strategists including Mark McCormick and Jayati Bharadwaj. “This is just the start to a more turbulent second-half backdrop, especially as the market has been able to mostly ignore the US political storyline so far.”

A debate between the US presidential candidates later this month may spark some interest from investors, they wrote. For now, the prospects of Marine Le Pen’s far-right party doing well in the French election and the potential impact on Europe’s commitment to supporting Ukraine “may well demand a risk premium” on central and east European currencies this month, according to ING Bank NV strategist Frantisek Taborsky.

Money managers are also looking ahead to US inflation data and the Federal Reserve interest rate meeting this week.

The Mexican peso approached a session high after changing directions multiple times throughout the session after Senate Majority Leader Ricardo Monrea said the timeline to discuss constitutional reforms will be coordinated with President-elect Claudia Sheinbaum. Traders also awaited news from a meeting between President Andres Manuel Lopez Obrador and his successor later tonight, as well as a press conference to follow.

One-month implied volatility in the peso has nearly doubled in the last week as it became clear the leftist ruling party had won a large majority in both chambers of congress.

“We expect the currency to reflect a higher risk premium, compared to before the elections, and remain volatile in the near term,” Bertrand Delgado, director for research and strategy at Societe Generale, wrote in a note.

Bucking the trend was the South African rand, which rebounded as traders looked ahead to talks between political parties to form a coalition government. The rand has been battered this month after the election on May 29 failed to produce an outright winner.

“Markets dislike uncertainty — anything that looks like a workable solution that diminishes uncertainty and the risk of extreme outcomes makes markets more comfortable,” said Razia Khan, chief economist for Standard Chartered Bank.

Argentina’s dollar bonds gained the most among emerging-market peers, rebounding after being been battered as lawmakers pushed back against President Javier Milei’s package of pro-market reforms. A vote on the so-called Omnibus bill is expected for June 12.

--With assistance from Mpho Hlakudi.

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