Emerging market currencies seem to be recovering their free fall trend, despite relatively weak US economic data, traders are still flocking to the US dollar as a traditional safe-haven asset. After US consumer confidence data came in below expectations, Latin American currencies weakened across the board, with the Mexican peso and Brazilian real leading the way, continuing the exchange rate decline. On Tuesday, as many currencies apart from the US dollar fell, a series of developing countries, from South Korea to the Dominican Republic and Lithuania, were using the global bond market to finance themselves near the relatively low point of 4.3% for the volatility and stability of US Treasury yields.

"This may be the trend of the dollar's recovery," said Marco Oviedo, senior investment strategist at XP Investimentos in São Paulo, stressing that this may be the beginning of the weakness of emerging market currencies. He said this volatile trend may continue until there is new market information. He added that this week's PCE inflation data and manufacturing data from the US may help clarify the real situation.

Under the continuous support of the hawkish rate dot plot and the frequent remarks of recent Fed officials to maintain high interest rates in the long term, the US Dollar Index, which measures the strength and weakness trend of the US dollar against a basket of mainstream currencies, has almost set a new high for the year in the near future. Since the beginning of this year, the US dollar index has risen by nearly 5%, compared with a drop of nearly 3% for the euro against the US dollar and more than 11% for the yen against the US dollar.

Eastern European currencies also suffered a collective blow as the exchange rate between the Hungarian forint and the Polish złoty and the dollar fell the most on Tuesday, reversing the exchange rate rise of the previous day across the board. In low-cost borrowing Asia, the exchange rates of some currencies against the US dollar unexpectedly rose in the foreign exchange market on Tuesday.

With the latest rate dot plot showing that the Fed will maintain high interest rates in the long term, coupled with the arrival of the European and US election cycle, as well as the general low growth of global economic data, the US dollar has entered a strong period in the global market's risk aversion.

In the African region, the South African rand, which has been performing well this year, continued to fall, even though the country's two largest political parties are about to reach an agreement on the number of departments they each take in the new government. Bank of America's strategy team said that even if the coalition government persists, the rise of the rand will be limited because the common trend of developing country currencies is a more important driving factor.

Foreign exchange traders continued to digest hawkish commentary from Fed officials on Tuesday, which triggered an important factor in the rise of the US dollar index. Fed director Cook said the Fed may need to cut interest rates "at some point" but the timing is unclear, while another director Bauman also said she believes there are some upward risks to US inflation prospects and reiterated the need to maintain borrowing costs continuously high for a period of time.

Emerging market bond market dynamics.

On Tuesday, the United Arab Emirates and Indonesia also issued bonds denominated in US dollars. The Indonesian government is seeking to issue five-year, ten-year and thirty-year Islamic bonds, of which the thirty-year bond is a green bond. South Korea will return to the dollar bond market for the first time since 2021. The UAE will also issue its first batch of euro-denominated bonds since September 2020, offering investors ten-year US dollar bonds.

In the secondary market, according to indicative pricing data collected by institutional outlets, Egyptian dollar bonds suffered the biggest drop among sovereign dollar bonds in emerging markets, with 2051-dollar bonds falling by over 1 US cent to 76 US cents. As the pound has fallen out of favour on Wall Street, its trading price is close to its lowest level since April.

Ecuadorian dollar bonds surged, leading the rise in emerging market dollar bonds. Ukrainian sovereign bonds continued to rise as traders digest the EU's military aid of around $1.5 billion to this geopolitically conflicted country. Colombian bonds also performed well as the government announced it would raise diesel prices for major consumers, reduce various subsidy sizes, and strengthen its fiscal account.

Emerging market stock market dynamics

Latin American stock indexes fell sharply on Tuesday, erasing some gains from Monday. However, a broad index covering emerging market stocks (mostly Asian stocks) rose for the first time in three days. Among them, semiconductor companies in Japan, South Korea, and China's Taiwan contributed the most to the gains. There is upward momentum in profit expectations, according to statistics compiled by institutions. Analysts' average profit expectations for emerging market companies with a 12-month maturity have risen to the highest level since September 2022.

Analysts are strengthening their views on the performance of emerging market companies as the high interest rate era gives way to expectations for loose policies in line with the Federal Reserve. Analysts generally bet that the Fed may begin to cut interest rates before December, and some even bet on the Fed's first rate cut in September, betting that there will be two rate cuts this year instead of just one as suggested by the Dot Plot.

Rajeev De Mello, Chief Investment Officer of Gamma Asset Management, said: "Expectations of profit growth for emerging market companies will support the entire financial market, and this growth rate may continue in a relatively positive macroeconomic environment."

Editor/ping