Emerging-Market Currencies Set for Best Performance Since 2017 Amid Late-Year Rally

As the tumultuous year for assets in developing countries nears its end, the benchmark MSCI EM Currency Index is on track for its most impressive performance since 2017, with a 3.44% gain this year.

A late-year rally saw the index rise by 0.4% to 1718.01 on Tuesday.

The rebound since early October is attributed to improving US inflation data, fostering expectations of a conclusion to interest-rate hikes by the Federal Reserve, and even the possibility of a cut in June.

Eugenia Victorino, Head of Asia Strategy at Skandinaviska Enskilda Banken AB, noted that while the case for an emerging-market rebound is strengthening, the rapid pace of recent gains may lead some traders to take profits, causing short-term volatility.

She emphasized that this doesn’t undermine the correctness of the direction but highlights the need for a more measured pace in the rebound.

The resurgence in developing-nation currencies contrasts with a year marked by unpredictable moves, including premature wagers on China’s economic growth, a Federal Reserve “pivot,” and uncertainties about local inflation.

The recent consensus in global markets, fueled by October data showing a sharp deceleration in US consumer-price growth, suggests that the era of monetary tightening may be over, resulting in the dollar heading for its most significant losses in a year and strengthening the case for investments in emerging markets.

Latin America and Eastern Europe have been key contributors to the return on emerging-market currencies this year, with central banks in these regions implementing some of the most aggressive rate hikes over the past three years.

The Polish zloty and Hungarian forint, in particular, have experienced notable rebounds since early October, supported by political stability and central bank actions.

Looking ahead, Goldman Sachs Group Inc. strategists anticipate that emerging markets will continue to offer attractive carry returns in 2024, emphasizing the potential for gains from sovereign bonds next year.