Emerging market currencies had a much-needed reprieve last week, with investors regaining their risk appetites following major elections in Turkey and Mexico. The JP Morgan Emerging Markets Currency Index was up as much as 0.6 percent to 64.72, bouncing back after touching a two-and-a-half year low.
The Turkish lira led the charge, jumping 1.5 percent to 4.597 per dollar after the country’s outgoing prime minister said lower interest rates and lower inflation will be among the top priorities of Turkey’s new administration. The Mexican peso was the next-best performer, advancing 1.1 percent to 19.23 per dollar for its third consecutive day of gains.
Last week's moves follow a rough second quarter for EM currencies. Dollar strength, higher US interest rates and widening trade tensions have all combined to hand the JPM EM Currency Index its worst quarter in seven years. The gauge fell 9 percent in the three months to June, the biggest drop since the third quarter of 2011.
Emerging markets having been battered by the rise in the dollar, as economic growth in the US heats up, and as the Federal Reserve looks set to continue on its path of rate increases. Global investors, notably those based in the US, have sought to evade exposure to some emerging markets as their currencies are expected to continue to decline. The threat of trade wars having only further fuelling further concern and prompted outflows.
With some analysts speculating that the recent sell-off in EM assets is not yet on the scale of the taper tantrum of 2013 when the US Federal Reserve promised to spare its post-crisis stimulus programme. But uncertainties over US trade policies and their impact on global growth means EMs will remain under fire.