On the eve of Powell's speech in Jackson Hole, strong data and hawkish statements dampen interest rate cut expectations, leading to a six-day decline in emerging market currencies
Emerging market currencies fell for the sixth consecutive day, as strong U.S. manufacturing data and hawkish signals from the Federal Reserve dampened rate cut expectations. The market is focused on Powell's speech at the Jackson Hole annual meeting, where he is expected to reiterate that tariffs have a limited impact on inflation and acknowledge a softening labor market. The President of the Cleveland Federal Reserve Bank expressed opposition to rate cuts, leading to a decline in emerging market currency performance. Analysts advise caution regarding high-yield emerging market foreign exchange
According to Zhitong Finance APP, emerging market currencies have fallen for the sixth consecutive day on Thursday, as strong U.S. manufacturing data combined with hawkish signals from Federal Reserve officials further pressured market expectations for a Fed rate cut. The market's focus is now shifting to Fed Chairman Jerome Powell's speech at the Jackson Hole Global Central Bank Annual Meeting on Friday.
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In this regard, Charlie Robertson, head of macro strategy at FIM Partners, predicts: "Powell may reiterate that tariffs have a limited ongoing impact on inflation while acknowledging a softening labor market, which will reinforce market interest rate expectations. However, unexpected news could trigger risk aversion, undermining the recent rebound in emerging markets." The minutes from the Fed's policy meeting released on Wednesday have already shown that inflation concerns continue to loom over the market.
Cleveland Federal Reserve Bank President Loretta Mester has clearly stated, "If a decision were needed tomorrow, I would not support a rate cut," which has led to a key indicator measuring the overall performance of emerging market currencies falling to its lowest level since early August.
Previously, this index was impacted by the preliminary August manufacturing PMI released by S&P Global, which rose 3.5 points to 53.3, reaching its highest level since May 2022 and far exceeding the 50 mark, highlighting that U.S. manufacturing is expanding at its fastest pace in over three years, further intensifying inflationary pressures.
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Ning Sun, senior emerging markets strategist at State Street Global Markets, pointed out: "Assessing the U.S. economic outlook is quite challenging at present, with factors from both supply and demand sides intertwining. It is advisable to maintain a cautious stance on high-yield emerging market currencies."
Specifically regarding various currencies, the Hungarian forint led the decline due to rumors of escalating conflict between Russia and Ukraine, as previous market expectations for a peace agreement have faded. The Latin American region showed divergence: the Brazilian real and the Mexican peso remained strong against the dollar, while the Chilean peso weakened significantly due to the resignation of pro-market Finance Minister Mario Marcel. According to insiders, the presidential office will announce a successor during the cabinet reshuffle ceremony on Thursday, and the benchmark stock index remains up, with interest rate swaps slightly rising.
In the stock market, the MSCI Emerging Markets Index rose slightly by 0.1%, ending a two-day decline triggered by a sharp drop in U.S. tech stocks. However, the bond market showed divergence: Ukrainian dollar bonds fell for the second consecutive day as some investors took profits after a rebound related to peace negotiations, with Jefferies adjusting its holdings to neutral; Senegal and Kenya dollar bonds led gains in the emerging market bond market.
In the geopolitical arena, former U.S. President Donald Trump hinted on social media that he would support Ukraine in launching more counterattacks against Russia, stating that former President Biden "appears incompetent for restricting Ukraine's counterattacks." Despite this statement aligning with his "America First" policy There are differences in the faction regarding the cessation of aid to Ukraine, but after the White House meeting with Zelensky on Monday, Trump has instructed officials to coordinate a meeting between the Ukrainian and Russian leaders and subsequent summits, with the Kremlin yet to respond.
Trump has also called for the U.S. and Europe to jointly formulate a security assurance plan to promote Kyiv's acceptance of the proposed territorial exchange agreement. The time and location of the current summit have yet to be determined, and the market is closely monitoring the ongoing impact of geopolitical situations on risk assets
