Enrique Díaz-Alvarez, Matthew Ryan, CFA, Roman Ziruk, Itsaso Apezteguia, Eduardo Moutinho & Michał Jóźwiak.
We’ve witnessed a broad rebound in risk currencies since the beginning of October, as markets double down on expectations that the Federal Reserve is done raising interest rates, and as Chinese economic data takes a moderate turn for the better. This has allowed most emerging market currencies to recover ground on the dollar, recouping some of their losses following a period of general strength in the latter in the third quarter of the year. The MSCI Emerging Market Currency Index has subsequently rallied to near-four month highs, while the JP Morgan Emerging Market Currency Index is currently trading at its highest level since late-August.
Among the BRICS currencies that we currently cover, which excludes the Russian ruble, the best performer since our last report in August has, somewhat surprisingly, been the Chinese yuan (-3.5% YTD vs. USD). Negative headlines surrounding the fragile state of China’s property sector and domestic demand continue to create a challenging environment for CNY. The renminbi has, however, managed to eke out modest gains in recent weeks, as Chinese economic data takes somewhat of a turn for the better, suggesting that the worst of the slowdown may now be behind us. The South African rand (-9.6% YTD) has followed not too far behind in recent months. After a disastrous first half of the year, the rand has recovered a chunk of its losses amid tentative optimism surrounding the South African energy crisis.
One of our long-held favourites, the Brazilian real, has continued its strong showing and remains one of the top performers in FX in 2023 (+7.8% YTD). We largely attribute this impressive performance to Brazil’s strong macroeconomic fundamentals, elevated commodity prices and the very high real interest rates in the country, which remain attractive to investors. Meanwhile, the Indian rupee (-0.7% YTD) has continued to trade within a relatively narrow range versus the dollar in the past three months. This has been enabled by ongoing intervention efforts from the Reserve Bank of India, which has continued to delve into its FX reserves in an attempt to prop up the currency.
A spate of US labor market report last week came out a touch softer than expected, culminating in the headline payrolls number for June. The data cannot be described as weak, and in fact US yields continued to head higher throughout the week, but FX markets took it as a sign that the recent dollar rally may have been overdone and popular trades were unwound. The winner of the week was the Japanese Yen, rebounding sharply even as emerging market currencies sold off, a sign that the popular trades of the year are running into headwinds and trader positions are being stopped out.
The focus for next week will be whether the recent spike in FX volatility and unwind of popular 2023 trades continues. US June inflation out on Wednesday. Further softening is expected on both the headline and core indices, which may be positive for the battered US bond markets but negative for the US dollar. The May employment and monthly GDP report are due from the UK, but this will otherwise be a quiet week for macroeconomic news.
