Emerging Market Currencies Rebound on Trade Relief
Emerging market currency traders have experienced modest gains in the first week since former US President Donald Trump's return to the White House.
The temporary absence of tariffs on Chinese imports has bolstered developing-world currencies, with a benchmark index poised to surge 1.1% this week, its strongest performance since November 2023. Trump's hints that he may not impose levies on China have further cheered investors, leading to a surge in demand for battered Asian currencies on Friday.
"It's a relief rally," said Alvin Tan, head of Asian FX strategy at Royal Bank of Canada in Singapore. "The market is relieved that the worst-case scenario of maximalist US tariffs promised by Trump during his campaign seems to be dissipating."
Emerging currencies are recovering after enduring their worst quarterly decline since September 2022 in late 2024, as traders factored in expectations of a widespread trade war and a more hawkish Federal Reserve amid inflationary pressures in the US. This week, currencies in emerging Europe and Latin America have led the gains, with the Polish zloty and Brazilian real climbing nearly 3%.
However, investor caution remains high due to persistent uncertainty over US policies. Despite a recent decline, JPMorgan Chase & Co.'s gauge of emerging-market currency volatility still hovers near its highest level since August. On Thursday, Trump reiterated the February 1 deadline for 25% tariffs on Canadian and Mexican goods and used a speech in Davos to threaten broader tariffs on goods not produced in the US.
A survey by HSBC Holdings Plc. revealed that 58% of fund managers overseeing $343 billion in emerging-nation assets were bearish on EM currencies in December, up from 10% in September. Commodity Futures Trading Commission data indicates that hedge funds are betting on declines in currencies like the Mexican peso.
"The threat of renewed trade wars will cap significant appreciation for EM currencies," said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore.