(Bloomberg) -- Emerging-market currencies sank on Thursday as the conflict in the Middle East drove demand for the safe-haven dollar, while US data supported bets that the US Federal Reserve will curb the pace of rate cuts.
MSCI Inc.’s benchmark for emerging-market currencies slipped for a third day, dropping as much as 0.5% before paring losses after an end-of-session adjustment. Chile’s peso sank the most during the US-trading session on the prospect that higher oil prices will hit the fuel importer harder. The key gauge for developing nation equities fell 1.3% as stocks traded in Hong Kong pulled back from a rally.
President Joe Biden told reporters he was “discussing” whether to support Israeli strikes on Iran’s oil facilities, fanning worries the conflict could escalate and hit energy shipments. Earlier, data showed US service providers expanded in September at the fastest pace since February 2023, while applications for US unemployment benefits rose slightly last week.
US yields rose as the data backed views that another 50 basis point cut by the Fed may not be justified, said Anders Faergemann, a fixed income portfolio manager at PineBridge Investments.
“Fewer cuts by the Fed may delay the easing by EM central banks, yet EM currencies still have a good cushion in terms of higher interest rates and have clearly benefited from the removal of the downside risk in China’s economy,” Faergemann said.
Investors are awaiting monthly US labor data on Friday that could give a better idea of the Fed’s path ahead. “If the data comes rather strong, we going to see US rates going up again tomorrow and EM FX suffer a bit,” said Marco Oviedo, a strategist at XP Investimentos.
Meanwhile, Mexico’s peso shook off early losses to post slight gains. The peso traded close to its 50-day moving average, which currency has been unable to break past since elections in June rattled markets. The peso has found some support this week as President Claudia Sheinbaum took office on Tuesday and investors bet she could embrace more market-friendly policies than her predecessor.
Also bucking the risk-off trend, the Turkish lira strengthened marginally after inflation in the country accelerated faster than every forecast in a Bloomberg survey of economists. The worse-than-expected readings may delay what would be Turkey’s first rate cut since early 2023.
The Hang Seng China Enterprises Index, the main barometer of sentiment on China this week as mainland markets remain closed, fell for the first time in 14 days as losses at Alibaba Group Holding Ltd. and JD.com Inc. weighed on the gauge.
Despite the pullback, money managers signaled the outlook for China has transformed because of the country’s recent barrage of stimulus measures. HSBC strategist Alastair Pinder upgraded Chinese stocks to overweight and Morgan Stanley’s Laura Wang said the country’s equities can gain a further 10% to 15% as the government may announce fiscal measures to expand the stimulus already announced.
“The rally has further to run,” said Fredrik Bjelland, portfolio manager of the $1.5 billion Skagen Kon-Tiki emerging-market fund. “Chinese valuations are attractive. Moreover, flows have been negative for a number of years, leaving global investors’ positioning light compared with history.”
--With assistance from Nicolle Yapur.
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