(Bloomberg) -- Developing-world currencies ranging from Latin America to Eastern Europe rose Monday ahead of the US election as traders reassessed bets on Donald Trump returning to the White House after weekend polls indicated Vice President Kamala Harris was gaining ground across key swing states.
MSCI’s index for emerging currencies gained 0.2%, with the Brazilian real and the South African rand leading the advance amid a widespread re-evaluation of the so-called Trump trade. The Mexican peso, which has suffered from Trump’s talk of imposing tariffs, also rose, recording its biggest intraday gain since September 13.
An index of the greenback dropped the most in more than a month, while Treasury yields fell. Bets on a Trump victory had supported the dollar on expectations of trade tariffs and inflationary policies that could force the Federal Reserve to keep a more restrictive monetary policy stance.
“Latam FX and rates are rallying as recent polls suggest a bounce in Harris polling,” according to Citi analysts led by Ernesto Revilla. Still, “the risk appetite remains low as the results can be binary, especially for some EM jurisdictions.”
A weekend poll showed Harris with a lead in Iowa — a state Trump has won in each of his prior election contests. Now, both candidates spend their final day on the campaign trail with multiple events in key states like Pennsylvania and North Carolina.
Across Latin America, the Brazilian real rose as much as 1.9% as the currency rebounded from Friday’s rout that was driven by rising concerns over the nation’s fiscal outlook. The currency is now gaining on the fading Trump trade as well as investor expectations that the government will announce spending cuts this week.
“Both BRL and MXN have been a very high beta to markets and US election repricing and overall rates movement, so a bit of retracing of the latter and overall election expectations following polls showing Harris somehow improved chances,” said Alejandro Cuadrado, strategist at BBVA. “In a way we may be seeing a preview of the potential market reaction to the final outcome.”
Brad Bechtel, global head of FX at Jefferies LLC, said he will be focusing on the Mexican peso and the impact of the election. Despite Harris’ advance in the latest polls, voters are narrowly split both nationally and across the swing states that will decide the election.
“I don’t think anyone has any idea what will transpire tomorrow although a tremendous amount of ink has been spilled trying to strategize around it,” Bechtel wrote in a note on Monday. “More likely than not though, it will take a few days to clear all the volatility, with things too close to call.”
Apart from the political risks, investors are also bracing for a series of central bank decisions this week that may amplify market swings. The Fed is widely expected to dial down the pace of easing to a quarter-point on Thursday. Markets will then turn their attention to Jerome Powell’s press conference, where he’ll give details on the central bank’s interest-rate path.
In eastern Europe, Poland and Romania will likely keep borrowing costs unchanged, while Czech policymakers look poised to extend interest-rate cuts. Meanwhile, Brazil’s central bank is expected to lift its benchmark rate amid concerns about fiscal slippage.
Meanwhile, MSCI’s gauge of emerging-market equities rose 0.7% on Monday, fueled by a rebound in the tech segment following last week’s selloff. Shares in chipmaker Taiwan Semiconductor Manufacturing Company Ltd. snapped a four-day decline and posted the biggest gain in two weeks.
--With assistance from Carolina Wilson.
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