The MSCI EM currency index was down 0.2% as the dollar reached its highest level of the year. The Brazilian real’s position as top performer in EM following the central bank’s decision to hold rates yesterday was short-lived, with investors now weighing the possibility of the easing cycle to resume later this year. The Turkish lira was the second worst-performing emerging-market currency after the Russian ruble.
A gauge of developing stocks was also trading lower, breaking a two-day winning streak fueled by excitement over tech companies.
A reluctance to move toward easing before the Fed reduces interest rates has prompted many central banks worldwide, particularly in emerging markets, to delay or slow their monetary policy cycles. Sticky inflation has further hindered policy-easing efforts globally, said Elias Haddad, senior markets strategist at Brown Brothers Harriman Investors.
Investors were tracking policy updates from other developed countries Thursday, with Switzerland delivering an unexpected cut while the Bank of England breathed fresh life into hopes for an imminent reduction in interest rates.
Fresh data from the US, particularly in the housing sector, pointed to economic weakness, but the country is still performing better than others and “it’s not foreseeable when the Federal Reserve will cut interest rates,” said Juan Pérez, director of trading at Monex USA.
Federal Reserve Bank of Minneapolis President Neel Kashkari said the central bank will return inflation to the 2% target, but estimated it will likely take a year or two.
The Fed’s tight policy will constrain performance in emerging-market local bonds at a time when margins of safety remain thin.
Hopes of an interest rate pivot in developing economies and the US had driven yields on EM local-currency debt lower. This has led to an anomaly in which higher US yields caused surprisingly “little pain” on the asset class, according to Barclays Plc.
Developing nations are still anticipating some normalization in policy stances, but Barclays points out that “terminal rates are likely to stay priced above neutral amid a shallow cycle expected in the US.” As a result, they expect local bonds to remain range-bound.
In South Africa, the rand snapped a four-day winning streak as traders turned their attention to how political parties forming South Africa’s government of national unity will divide up key ministerial positions in President Cyril Ramaphosa’s cabinet. The currency was among the worst performing currencies across EM.
