Emerging currencies, equities set for worst week since pandemic

Emerging-market equities and currencies are set for the biggest weekly decline since the height of the pandemic in 2020.

The MSCI EM currency gauge has slid about 1.4% this week, while the comparable gauge for EM equities is down more than 6%. Both are on track for their worst week since March 2020 on a closing basis. The surge in oil prices — with Brent futures climbing this week to their highest level since July 2024 — continues to weigh on the outlook for EM currencies.

“We have trimmed quite a bit of risk in the last few days but will want to get back into long EM positions on hints of stabilisation,” Citigroup analyst including Luis Costa wrote in a note. While there are “initial signs of stabilisation of oil prices,” it is too early to assume that oil prices will play out like in 2022 following Russia’s invasion of Ukraine.

Haven demand for the greenback has pushed all emerging-market currencies lower versus the dollar this week. Markets are particularly focused on the currencies of net oil importers — predominantly in Asia — as well as the impact on domestic inflation.

Bangko Sentral ng Pilipinas Governor Eli Remolona Jr. said in a Bloomberg Television interview on Friday that oil reaching $100 per barrel could force monetary policy tightening, as inflation may breach the central bank’s target range.

The won on Tuesday suffered its largest single-day loss on a closing basis since 2009, as investors warned about the risk of forced deleveraging and liquidations. Volatility in emerging-market currencies has also surged, with the JPMorgan EM FX volatility index rising above a similar gauge for Group-of-Seven peers this week, following its longest stretch on record below that level.

Aside from tensions in the Middle East, investors will be watching the release of US nonfarm payrolls data for clues on the Federal Reserve’s rate trajectory.

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