FX markets pivot as rate-hikes in some EMs look more likely
Global investors are unwinding bets on local-currency bonds as some emerging-market central banks come under pressure to raise interest rates — rather than cut them as widely anticipated just weeks ago.
Money managers differ on the roster of countries that may have to tighten monetary policy in response to a changed global landscape, but among them are turbulent economies such as Turkey and South Africa, and even emerging giants like India and Mexico. Whether those nations will actually raise borrowing costs depends in part on moves in currencies and commodities in the coming weeks to months.
But fears of a delayed easing cycle are already upending the most popular trade at the start of the year: buying local-currency bonds seen as benefiting from rate cuts. A Bloomberg gauge of the asset class posted the biggest monthly decline since September, erasing $62 billion in market value. Carry trades have slumped to the deepest losses since 2021 and breakeven rates are spiking from South Africa to Mexico.
“Certain countries stand out as potentially vulnerable to enacting rate hikes,” said Cliff Ambrose, founder and wealth manager at Apex Wealth in Danvers, Massachusetts. “Those overly reliant on external financing, exposed to commodity-price fluctuations, or grappling with political instability may face greater challenges.”
He listed India, Turkey, Indonesia, Mexico, Brazil and South Africa as the most exposed.
The greenback has rallied against 31 of the 32 most widely-traded emerging-market currencies since April 10, when US inflation data came in higher than anticipated and pushed money-market investors to prune wagers for Fed rate cuts. That coincided with a return of inflation in a number of developing nations from
Read more on investmentnews.com
