EM currencies set for biggest jump since 2016 on China, US boost

An index of emerging-market currencies jumped by the most in more than six years as China eased some quarantine rules for travelers and as the dollar weakened amid growing bets for a slower path of Federal Reserve rate hikes.

MSCI’s gauge of developing currencies jumped 1.5%, headed for its biggest gain since March 2016. South Korea’s won and the Thai baht led the rally as the Chinese yuan surged by more than 1%. The Philippine peso strengthened the most in over two decades and the Indian rupee saw its biggest jump in four years.

The currencies started the day with strong gains in the aftermath of Thursday’s cooler-than-expected US inflation data, which extended after China cut the amount of time travelers and so-called close contacts must spend in quarantine. The move marked a significant calibration of the Covid Zero policy that has isolated the world’s second-largest economy.

Easing US price pressure has boosted speculation that the Fed will be less aggressive in raising interest rates, bolstering the prospect that the dollar has reached a peak. A slower pace of US hikes may offer some respite for emerging-market assets, which have tumbled this year amid an exodus of cash from risk assets.

“I expect this rally to last as two big worries that have driven markets lower are seeing some signs of improvement: high US inflation and weak China growth,” said Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management. “The reversal in the US dollar is an additional support for EM.”

The manager, who has been increasing his positions in Latin America for a few weeks, said he would buy currencies, bonds and equities in Asia as the region has “been under-owned.”

Given how beaten down some Asian assets are, the attractive valuations may start to entice foreign inflows back in, given the sharp outflows seen so far this year, said Khoon Goh, head of Asia research at ANZ in Singapore.

South Korea’s won jumped 4.5%, while the Thai baht advanced 2.6%. The won also benefited from South Korea saying it will ask major public investors to expand currency hedging, to alleviate dollar demand and increase supply in the local foreign exchange market.

Open question

The Polish zloty, Czech koruna and South African were also stronger, though they trailed their Asian peers.

For NatWest Markets strategist Galvin Chia, it’s still an open question whether investors will have high conviction buying emerging-market assets, as financial conditions remain tight, rates high and developed economies look to be slowing. But there are also reasons to expect further gains.

“There is probably a bit of room for this rally to continue, given that the next US inflation print and Fed meeting are in mid-December,” he said. “We may be starting to emerge from the peak pessimism around EM FX.”

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