Emerging-market currencies are celebrating their biggest weekly gains of 2024. On Friday, these currencies rose sharply, buoyed by a weaker dollar and a bounce-back in global equities. This uptick marks a significant recovery after a rough start to August, showcasing resilience in the face of global market challenges.
The MSCI Emerging Markets (EM) currency index has surged for the second consecutive day, even reaching its highest level in two years. Leading the charge are the South Korean won, Malaysian ringgit, and Israeli shekel. This rise is attributed to a global rebound in stocks and a notable rise in Taiwan Semiconductor Manufacturing Co.’s sales, driven by strong demand for artificial intelligence chips.
Weaker Dollar Boosts Emerging-Market Currency
A crucial factor behind the recent emerging-market currency gains is the weakening of the US dollar. As global investors unwind carry trades, the Japanese yen’s strength has contributed to a weaker dollar, creating a favorable environment for emerging-market currencies. The decline in the yield and carry of long US-dollar positions is expected to support EM currencies, bonds, and rates, according to strategists at Societe Generale SA.
Stephen Chiu, Chief Asian FX Strategist at Bloomberg Intelligence, highlighted that as the market anticipates a Federal Reserve rate cut and the unwinding of carry trades, emerging-market currencies are poised to rise against the dollar. Lower-yielding emerging-market currencies are expected to outperform their higher-yielding counterparts.
Fed Rate Cuts and Its Resilience
The Federal Reserve’s anticipated interest rate cuts are weighing on the dollar, which in turn is easing the pressure on central banks in emerging markets. Countries from India to Indonesia have had to intervene this year to support their currencies, but the easing of dollar strength is providing relief.
According to Chiu, unless the Fed adopts a more hawkish stance or there are unexpected surprises in US economic data, the gains in emerging-market currencies are likely to continue. European stocks and US equity futures have also edged higher, with the Stoxx Europe 600 index rising by 0.7% and futures on the S&P 500 and Nasdaq 100 showing positive movement.
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What’s Next for Emerging-Market Currency Gains?
Despite the positive momentum, market volatility remains high. The recent rise in emerging-market currencies has been accompanied by mixed signals from US central bank officials. Federal Reserve Bank of Kansas City President Jeffrey Schmid has expressed reservations about supporting a rate cut while inflation remains above target.
Swap traders have adjusted their expectations, trimming bets on aggressive Fed easing for 2024. At one point, interest-rate swaps suggested a 60% chance of an emergency rate cut by the Fed, but current pricing now indicates around 40 basis points of cuts for September.
In Europe, specific companies are making headlines. Assicurazioni Generali SpA, an Italian insurer, saw its shares drop after missing earnings expectations due to storm and flooding claims. Conversely, Hargreaves Lansdown Plc gained following a significant £5.4 billion deal with a consortium including CVC and ADIA.
The Broader Market Impact
In Asia, while the stock rally has lost some steam, the yen’s temporary rise has impacted market dynamics. Japan’s Topix index saw a reduction in gains, while Chinese shares flattened after an initial advance.
The unwinding of carry trades is likely to continue, with short-yen positions being slashed as the Japanese currency strengthens. Bob Savage from BNY Mellon Capital Markets suggests that investors remain too bearish on the yen, which could see further appreciation.
In commodities, oil prices have steadied after a Thursday rally, while gold has seen a slight decline.
Overall, the emerging-market currency gains are a testament to the shifting dynamics in global markets and the influence of Federal Reserve policies on currency movements. As investors navigate these changes, emerging-market currencies are proving to be a key area of focus and potential opportunity. Stay tuned for more updates on this evolving story on The Bit Journal.
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