Emerging Currencies Close to Erasing 2023 Gains as Gloom Deepens

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(Bloomberg) — Developing-nation currencies fell for a fourth day, coming within a whisker of erasing all of this year’s gains.

A loss of 0.8% this week has left MSCI Inc.’s gauge of emerging-market currencies just 0.3% up in 2023. Anxiety over the Federal Reserve potentially keeping interest rates higher for longer, China’s plans to expand a ban on the use of iPhones and weak German economic data dented sentiment toward riskier assets on Thursday. 

“Sluggish growth in China, a persistently hawkish Fed and the prospects of stagflation in the Eurozone are not particularly conducive factors for EM currencies,” said Piotr Matys, a currency analyst at InTouch Capital Markets. 

The Polish zloty was again the biggest loser among developing currencies after the central bank cut rates more than expected Wednesday. The governor of the country’s central bank, Adam Glapinski, defended the cut, saying that inflation will likely slow to 8.5% in September, and pushed back on accusations that the move was politically motivated. 

The Chilean peso followed the zloty as the second-worst performer in the developing world, sinking to a new year-to-date low for the second time this week. Falling interest rates are undermining the currency’s appeal to carry traders, especially when compared to regional peers like Colombia, which is the top gainer Thursday.

Turkey’s lira weakened for a fifth day, even after President Recep Tayyip Erdogan appeared to back the more orthodox monetary policy of his new economic team that requires higher interest rates. 

Read More: Turkey Circles the Wagons to Appease Market Doubting Erdogan

China’s economic troubles and the dollar’s renewed vigor have weighed on emerging assets, with equities sliding for a third day. China’s property developer stocks dropped following a sharp rally in the previous session that was fueled by bets on further policy support.

The Chinese yuan dropped to a 16-year low against the dollar, despite the People’s Bank of China setting its daily reference rate at a stronger-than-expected level for a 54th straight day.

To encourage sustained capital inflows back into emerging markets, Beijing may have to unveil a “comprehensive package of reforms to address structural issues of the Chinese economy,” and the Fed will need to signal that rates could be cut in the first half of 2024, said Matys at InTouch Capital. 

Elsewhere in Asia, the ringgit weakened for a fifth day after Malaysia kept its benchmark interest rate unchanged for a second straight meeting as the country seeks to support economic growth. The policy statement no longer describes the central bank’s monetary stance as “slightly accommodative,” removing any residual expectation for additional tightening, said Frances Cheung, a rates strategist at Oversea-Chinese Banking Corp. in Singapore. 

(Updates with Chilean peso in the fifth paragraph.)

©2023 Bloomberg L.P.





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