By Zijia Song, Matthew Burgess and Heng Xie.
Most emerging-market currencies jumped after US President Donald Trump said the US has held talks with Iran and suspended any further airstrikes against energy infrastructure for five days, sending oil prices tumbling on Monday.
Chile’s peso, Hungary’s forint and Brazils real led gains among peers. MSCI’s gauge tracking emerging-market currencies rose as much as 0.8% during the trading session before closing 0.3% lower due to an end-of-day index adjustment.
MSCI’s Emerging Markets Index fell 3%. Trump said the US would postpone strikes against Iran’s energy infrastructure after what he called “productive conversations” with the country.
He also claimed the Strait of Hormuz — vital to global energy supplies — will be open very soon if talks are successful, adding that it may be jointly controlled. The comments hit the dollar and pushed oil 11% lower, though Brent crude remains around $100 a barrel.
Israel continued to bomb Iran, and the Iranian foreign ministry and local media denied Trump’s claim that talks were taking place.
Despite skepticism surrounding the US talks with Iran, the jump in developing-nation currencies was warranted, said Alvaro Vivanco, Wells Fargo’s emerging markets macro strategist. “The price action before had been extreme.”
In case of a de-escalation, Vivanco recommends shorting the dollar against the Chilean peso with a target of 910, and betting on short-term rate reductions in Mexico and Brazil.
“The curves are pricing a very hawkish path in Mexico and Brazil, which seems hard to sustain even if oil stays elevated,” he added.
ETF withdrawals
The three weeks of conflict in the Middle East had weighed heavily on emerging-market assets, pushing investors to withdraw more money from exchange-traded funds that buy EM stocks and bonds. Outflows from these funds for the two weeks ending on March 20 totalled $3.82 billion.
In other news, investors will gain more insights into central bankers’ thinking on inflation given the spike in energy costs, as more policymakers in developing world are set to announce policy rates. The South African rand gained 1.4% on improved risk sentiment Monday.
Traders are now pricing four rate hikes this year, flipping from having priced cuts just a month ago.
South Africa’s central bank is expected to hold rates steady on Thursday but signal a hawkish stance. A similar outcome is expected of central bank meetings in Chile, Hungary and Mexico this week, with markets pricing rate hikes in all these countries over the coming year.