(Bloomberg) — Emerging-market currencies dropped after strong US payroll data caused traders to reprice odds the Federal Reserve will cut interest rates in the first half of the year.
Most Read from Bloomberg
Nonfarm payrolls climbed 303,000 last month, the strongest in nearly a year, following a combined 22,000 upward revision to job gains in the prior two months. Following the release, Fed swaps shifted full pricing of a rate cut to September from July and Treasury 10-year yields climbed to the highest in over four months.
This “shifts rate cut expectations further out the curve which will keep the USD strong,” said Brad Bechtel, global head of FX at Jefferies Financial Group Inc.
Officials added to the view that US rates may remain higher for longer. On Friday, Federal Reserve Bank of Dallas President Lorie Logan signaled its “much too soon” to think about rate cuts, citing upside inflation risk and the resilience of the US economy, while Fed Governor Michelle Bowman reiterated that it’s too soon to consider lowering borrowing costs.
A gauge for EM currencies declined 0.1%, off its daily lows, with the Chilean peso and the South Korean won leading losses. On other end, the Mexican peso posted the best gains among major currencies on Friday and extended its lead as the best performing currency in the world.
“A better-than-expected performance of the US economy is good for the MXN,” said Luis Hurtado, a currency strategist at CIBC in Toronto. But an erosion of the currency’s carry appeal as Mexico lowers rate, combined with “stretched” positioning may keep speculators at bay, he added.
Read More: Mexican Peso’s World-Beating Rally Can’t Shake Off Its Doubters
MSCI Inc.’s benchmark for EM equities fell 0.3%, paring this week’s gains to around 0.2%. The index was dragged down by health care stocks, as WuXi Biologics and other China biotech companies fell in Hong Kong amid concerns that the impact of the US’s Biosecure Act could become more widespread.
Middle East Tensions
Mounting tensions in the Middle East are further adding to the risk-off sentiment. Iran said it asked the US to “step aside” as the country prepares a response to a suspected Israeli attack on its consulate in Syria while Hezbollah, its main proxy in the Middle East, warned the Jewish state it’s prepared for war.
Read More: The Israel-Iran Shadow War Reaches a Risky New Phase: QuickTake
“The market now knows that some kind of retaliation from Iran will likely come but it doesn’t know when and where and what,” said Bjarne Schieldrop, an analyst at SEB Research. “That creates a great discomfort and nervousness.”
Oil rose about 1% Friday, to above $91.61 a barrel and helping fan inflation concerns.
Elsewhere, Zimbabwe announced its new currency policy on Friday, replacing its battered dollar with a new currency called ZiG, which will be backed by a basket of foreign currencies, gold and other precious metals.
–With assistance from Leda Alvim.
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.
