Emerging Currencies Dip as Middle East Risk, US Data Cloud Views

(Bloomberg) -- Emerging-market currencies slipped Wednesday as concerns over further escalation of the Middle East conflict weighed on risk appetite and traders pared bets for a big US interest rate cut.

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An MSCI index for developing-world currencies closed slightly lower for a second day with the Chilean peso and Hungarian forint leading declines. The MSCI gauge for emerging-market stocks, meanwhile, rose 1.3% and touched its highest level since February 2022. Chinese shares listed in Taiwan surged amid a holiday in mainland China following a spate of stimulus measures there.

Private employer data in the US came out stronger than expected on Wednesday, undermining the case for big cuts by the US Federal Reserve that would increase the appeal of higher-yielding emerging-market assets. Investors will be closely watching more US labor market data due on Thursday and Friday to better estimate the path of the Fed.

Meanwhile, oil rose, lifting Colombia’s peso, as Israel’s Benjamin Netanyahu vowed to retaliate against Iran after a missile strike at Israel. World powers fear an escalation of hostilities between the adversaries could spiral into a Middle East-wide war.

“Markets have been relatively fearless regarding the increased tension in the Middle East,” said Luis Estrada, a strategist at RBC Capital Markets. Elsewhere, “the China stimulus has been a pleasant surprise for emerging markets,” he said.

Hungary’s forint slumped to its lowest level in more than a year against the euro even as its central bank pledged to maintain “disciplined and tight” monetary policy. Bank of America strategists said in a note that the forint was set to underperform amid concerns of a dovish turn with a change in leadership at the bank in March.

Chile’s peso sank after economic activity in the Andean nation unexpectedly fell, backing calls for more interest rate cuts. Moreover, the rise in crude prices threatened to pressure the fuel-importing country’s trade balance.

The Chilean currency has been the top performer in emerging markets since the US Federal Reserve moved to cut interest rates last month and China began to unveil stimulus measures. Estrada expects both the Chilean peso and Brazil’s real to be supported by Chinese demand for their commodity exports. Moody’s Ratings upgraded Brazil to the cusp of investment grade on Tuesday, but early gains in the real faded Wednesday.

The Mexican peso outperformed, gaining around 1% after the nation’s new president struck a moderate tone on Tuesday and nodded toward the need for more private energy investment, which could mark the start of a more market-friendly administration compared to her predecessor.

“At the moment, everybody’s giving her the benefit of the doubt,” said Bertrand Delgado, director for research and strategy at Societe Generale. Delgado said Latin American currencies could hold up the best amid concerns about the Middle East since the conflict will support prices for the region’s commodity exports.

MSCI’s emerging-market currency gauge is basically flat since the US Federal Reserve started to cut interest rates last month. A surprisingly strong dollar has defied expectations for bigger gains in the developing world, Estrada said, adding that euro-funded bets on the real could pay off since Europe’s economy seems to be slowing faster than the US.

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