Published Jul 02, 2018 10:18AM ET
Trade Wars Bite as Emerging Currencies Decline to 10-Month Low
(Bloomberg) -- With a trade kerfuffle bruising investors, assets across emerging markets started the week with more declines.
Mexico’s peso reversed early gains to weaken 1.1 percent against the dollar by 3:11 p.m. in London after 64-year-old leftist Andres Manuel Lopez Obrador’s landslide election victory, according to the earliest figures announced by officials. The zloty, rand, lira and yuan also fell as the Bloomberg Dollar Spot Index rose 0.6 percent.
Attention will then turn to U.S. jobs data and the Federal Reserve minutes on Thursday, as well as unemployment data on Friday as investors gauge whether trade friction has impacted the nation’s economic outlook. A U.S. deadline for $34 billion in tariffs on China is also due Friday. The Asian country has pledged to retaliate if President Donald Trump follows through.
“Things have got to get worse before they get better -- that’s the disturbing situation,” Claudio Piron, co-head of Asian currency and rates strategy at Bank of America Merrill Lynch (NYSE:BAC) in Singapore, told Bloomberg TV’s Haidi Lun and Rishaad Salamat.
This week will be highly critical with election results in Mexico “and how that will have a bearing on Nafta,” Piron said. The deadline for tariffs is “going to be key” in determining how much worse the situation will get “before things can possibly get better,” he said.
The war of words between the world’s biggest economies over commerce added fuel to a sell-off sparked by a rising dollar and hawkish central banks in developed economies. It sent a Bloomberg currency index that measures carry-trade returns from eight emerging markets, funded by short positions in the dollar, tumbling the most on a quarterly basis since 2011.
Emerging-market stocks and currencies dropped the most since 2015 in the three months through June, and a Bloomberg Barclays (LON:BARC) index of local-currency bonds posted its first quarterly retreat since 2016. Both the equity and currency gauges extended their declines on Monday, with the latter heading for its lowest since August.
“The practical impact of the trade wars is small thus far and is beneficial to many emerging-market credits, for example oil and metals companies, but the bearish impact on sentiment and possibility of a downward spiral overwhelms this,” said Richard Segal, a senior analyst at Manulife Asset Management Ltd. in London.
“It’s advisable to remain cautious for a while, and better buying opportunities will appear later in the summer,” he said.
It’s All China
Mexico Votes
Data Driven
Central Bankers Have Their Say
(Updates from first paragraph with Mexican currency moves.)
Written By: Bloomberg
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