Emerging Currencies Fall as Middle East Conflict, US Data Weigh

Emerging-market currencies weakened on Thursday as concern about the conflict in the Middle East drove demand for the safe-haven dollar, while US data supported bets that the US Federal Reserve will moderate the pace of rate cuts.

(Bloomberg) — Emerging-market currencies weakened on Thursday as concern about the conflict in the Middle East drove demand for the safe-haven dollar, while US data supported bets that the US Federal Reserve will moderate the pace of rate cuts. 

MSCI Inc.’s benchmark for emerging-market currencies slipped for a third day, losing about 0.4%, with Malaysia’s ringgit and Chile’s peso posting declines of around 1%. The index is headed for its biggest one-day loss since April.

The key gauge for developing nation equities fell 1.5% 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.   

“We have been surprised by the muted reaction to the conflict in the Middle East, which suggests that the main driver of returns remains the expectation of central bank easing,” said Anders Faergemann, a fixed income portfolio manager at PineBridge Investments. US yields are rising since it “remains uncertain whether the economic slowdown warrants another 50 basis point rate cut.” 

Investors are awaiting monthly US labor data on Friday that could give a better idea of the Fed’s path ahead. 

“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.

Meanwhile, 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 said it’s “not too late to enter the rally.” 

Meanwhile, 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.”

Data showed US exchange-traded funds that invest in Chinese stocks are winning accelerated inflows. BlackRock Inc.’s iShares China Large-Cap ETF received $577 million of fresh deposits on Wednesday.