Developing-world currencies from Latin America to Eastern Europe have experienced a significant surge on Monday, as traders reassess their bets on Donald Trump's return to the White House. This shift comes in the wake of weekend polls indicating that Vice President Kamala Harris is gaining ground across key swing states, potentially altering the political landscape ahead of the highly anticipated US election.

Currencies Rebound Amid Shifting Election Expectations

Emerging Currencies Gain Ground

MSCI's index for emerging currencies has gained 0.2%, with the Brazilian real and the South African rand leading the advance. This widespread re-evaluation of the so-called "Trump trade" has also seen the Mexican peso, which has previously suffered from Trump's talk of imposing tariffs, record its biggest intraday gain since September 13. The greenback has also dropped the most in more than a month, while Treasury yields have fallen, as bets on a Trump victory had previously supported the dollar on expectations of trade tariffs and inflationary policies that could force the Federal Reserve to maintain a more restrictive monetary policy stance.

Latam FX and Rates Rally

According to Citi analysts led by Ernesto Revilla, "Latam FX and rates are rallying as recent polls suggest a bounce in Harris polling." However, the analysts caution that "the risk appetite remains low as the results can be binary, especially for some EM jurisdictions." This sentiment is echoed by BBVA strategist Alejandro Cuadrado, who notes that "both BRL and MXN have been a very high beta to markets and US election repricing and overall rates movement, so a bit of retracing of the latter and overall election expectations following polls showing Harris somehow improved chances."

Potential Market Reaction to Election Outcome

Jefferies LLC's global head of FX, Brad Bechtel, has stated that he will be focusing on the Mexican peso and the impact of the election. Despite Harris' advance in the latest polls, Bechtel acknowledges that "voters are narrowly split both nationally and across the swing states that will decide the election." He further adds, "I don't think anyone has any idea what will transpire tomorrow although a tremendous amount of ink has been spilled trying to strategize around it. More likely than not though, it will take a few days to clear all the volatility, with things too close to call."

Central Bank Decisions Amplify Market Swings

Investors are also bracing for a series of central bank decisions this week that may amplify market swings. The Federal Reserve is widely expected to dial down the pace of easing to a quarter-point on Thursday, and markets will then turn their attention to Jerome Powell's press conference, where he'll give details on the central bank's interest-rate path. Meanwhile, in Eastern Europe, Poland and Romania will likely keep borrowing costs unchanged, while Czech policymakers look poised to extend interest-rate cuts. In Brazil, the central bank is expected to lift its benchmark rate amid concerns about fiscal slippage.

Emerging Market Equities Rebound

MSCI's gauge of emerging-market equities rose 0.7% on Monday, fueled by a rebound in the tech segment following last week's selloff. Shares in chipmaker Taiwan Semiconductor Manufacturing Company Ltd. snapped a four-day decline and posted the biggest gain in two weeks, contributing to the overall rebound in the emerging market equity space.