Emerging markets currencies lifted by easing growth concerns

Emerging market currencies kicked off the second quarter on firmer footing on last week, as a rebound in Chinese and US manufacturing helped allay some of the ongoing concerns over the outlook for the global economy and rekindled investors’ appetite for riskier assets. The JPMorgan Emerging Market Currency index rose as much as 0.9 per cent to 63.06 to claw back the losses from its prior three sessions.

With the South African rand leading the charge, rising 2.4 per cent after a review and left the country with its investment grade rating intact for now. A downgrade to junk would have forced fund managers who are limited to holding investment grade debt to sell their holdings and heaped further pressure on the currency. The Turkish lira was last weeks best performing emerging market currency, climbing 1.2 per cent after President Recep Tayyip Erdogan’s ruling coalition suffered one of the worst election results of his 16 years in charge. In Latin America, the Mexican peso, the Brazilian real, the Argentine peso all advanced more than 1 per cent as the pick up in Chinese and US manufacturing helped beat back concerns that global growth is slowing.

The risk-on mood also drove demand for EM equities. The MSCI EM index was up 1.2 per cent, with China’s CSI 300 rising 2.6 per cent to its highest since March 2018. Hong Kong’s Hang Seng added 1.8 per cent while the major bourses in Latin America booked gains of about 0.8 per cent. A run of disappointing economic data in China, Europe and the US, and a marked shift in the tone of the European Central Bank and the US Federal Reserve have heightened investors’ fears in recent weeks over slowing economic growth and triggered a sharp rally in sovereign bond prices. Despite last week’s robust bounce, there remain however lingering macroeconomic headwinds, which will probably continue to offset any support that a more dovish Fed may provide.