(Bloomberg) — Currencies and stocks in developing economies advanced Monday as sentiment for risk assets rebounded on speculation that the Federal Reserve will resume cutting interest rates.
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MSCI’s index for developing currencies rose 0.4%, notching the biggest daily gain in over a month, while a similar measure for stocks strengthened 0.9%. Investors are betting that the Fed may lower interest rates as soon as next month, with an upcoming change in its board and the firing of the US government’s chief labor statistician adding to downside risks for the dollar.
“The bearish USD thesis remains intact and, although there are grounds to think that the risk backdrop is about to get shakier, a weaker DXY will naturally support EM,” wrote Morgan Stanley strategists including James Lord and Simon Waever, adding that their exposure to emerging market currencies is limited.
Emerging-market currencies came off from Monday’s session highs after US President Donald Trump threatened to hike tariffs on India above the punitive rate of 25% announced last week due to New Delhi’s purchases of Russian oil.
The $10-billion iShares MSCI India ETF dropped as much as 0.6%. Trump’s post didn’t specify by how much he would raise the levy.
“Those who thought that Trump might reconsider his tariff strategy once the negative impacts on the US economy became visible, are now being proved wrong,” Thu Lan Nguyen, the head of FX and commodity research at Commerzbank AG, said in a note. “Instead of facing reality, the US president apparently prefers sweeping the problem under the rug.”
Fed Moves
Trump said he’ll announce a new Fed governor in the coming days, in a move that may bring in a policymaker more closely aligned with his preference for lower rates. That space opened up after Adriana Kugler said Friday that she would vacate her board of governors seat, which wasn’t due to expire until January.
Trump will also announce the replacement for the Bureau of Labor Statistics’ head in a move that is seen as potentially undermining the credibility of the institution’s data.
The Philippine peso was the best performers among peers, gaining about 1% against the dollar. Most other Asian FX markets also rose versus the greenback, with Goldman Sachs strategists expecting the South Korean won and Taiwanese dollar to outperform other EM currencies in the region.
