Emerging Market Currencies Soar as Trump’s Tariff Plans Eased
Relief Rally
Emerging-market currencies climbed during the first week of Donald Trump’s second term, helped by a softer-than-expected rollout of US tariffs and the absence of new levies on Chinese imports. The benchmark index for developing-nation currencies rose 1.2 per cent last week, the best weekly showing since July 2023.
Tariffs Eased, Relief Rally
Trump’s comments hinting that he would rather not impose levies on China helped lift Asian currencies on Friday (Jan 24). "It’s more of 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" regarding US tariffs "appears to be falling by the wayside".
Rebounding After Worst Quarter
Emerging currencies are rebounding after their worst quarterly drop since September 2022 as traders priced in expectations of a widespread trade war and a more hawkish Federal Reserve stance amid inflationary pressure in the US. Currencies in emerging Europe and high-yielding Latin American names paced the gains, with the Hungarian forint, the Brazilian real, and the Colombian peso advancing more than 2.5 per cent last week.
Carry Trades and High-Yielding Currencies
"There’s renewed demand for carry as tariff fears ease and volatility wanes," said Bernd Berg, a London-based strategist at In Touch Capital. "High-yielding Latin American names are profiting the most after selling off last year."
Emerging Market Stocks
Emerging-market stocks also benefited from the easing fears. An MSCI index ended the day 0.8 per cent higher on Friday, extending weekly gains to 1.9 per cent.
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More Good News for Emerging Markets
Investors had been on tenterhooks for the first executive orders from the White House after Trump vowed to quickly implement his "America First" policy agenda. But in his initial batch of economic announcements, China was omitted from tariff plans which only targeted Mexico and Canada with 25 per cent levies from Feb 1.
Potential for Further Relief
The combination of a bearish positioning going into a second Trump administration and the softer-than-feared stance on tariffs has been enough to bolster assets, and JPMorgan Chase sees room for additional relief for currencies such as the forint and South Africa’s rand.
Conclusion
The Malaysian ringgit climbed more than 1 per cent on Friday to the highest since November, the biggest gainer in Asia. While investors remain wary, the easing of tariff fears has provided a reprieve for emerging-market currencies.
FAQs
Q: What happened to emerging-market currencies?
A: Emerging-market currencies soared as Trump’s tariff plans were seen as softer than expected.
Q: What is the current sentiment among fund managers?
A: According to a survey by HSBC Holdings, 58 per cent of fund managers are bearish on EM currencies in December, up from 10 per cent in September.
Q: What is the current level of emerging-market currency volatility?
A: JPMorgan’s gauge of emerging-market currency volatility has eased, but remains at its highest since August.
