Emerging Markets Currencies Defy Volatility, Notch Eighth Week of Gains

Despite the wavering risk-on mood sparked by the Federal Reserve's rate cut, a gauge of emerging-market currencies has managed to maintain an impressive eight-week streak of gains. While the Brazilian real and Mexican peso trailed their peers on Friday, the overall MSCI index for emerging-market FX remained flat for the day, capping off a solid week of advances. The accompanying index for EM stocks also rose 0.6% and ended the week 2% higher.

Navigating Choppy Waters: Emerging Markets Currencies Resilient Amid Diverging Fed Signals

Mideast Tensions and Fed Speak Fuel Volatility

Mideast tensions brewed, and the euphoria following the Fed's half-point rate cut faltered amid diverging comments from Fed governors. Christopher Waller attributed his support for the Fed's larger cut to favorable inflation data, while Michelle Bowman, the lone dissenting voice, cautioned that the move was declaring victory over inflation too early. This mix of factors created a "choppy day" for markets, as described by Jayati Bharadwaj, a strategist at TD Securities.

Awaiting Clarity on the Fed's Next Move

With the markets lacking clarity on the Fed's next steps, traders will turn their attention to a spate of key data releases in the US next week. These reports are expected to provide more clues as to whether the rate-setters will be able to engineer a soft-landing for the world's largest economy.

Latin American Currencies Face Headwinds

In Latin America, the Brazilian real slipped and snapped a six-day rally, while swap rates jumped a second day amid concerns over the country's fiscal outlook. The Mexican peso also took a dip as traders wagered that the Fed's large cut will signal further easing from Mexico's central bankers at their September 26th meeting, potentially chipping away at the peso's appeal.

Asia's FX Markets Shine Amid Supportive Factors

In Asia's FX markets, Indonesia's rupiah was one of the biggest gainers, buoyed by rising bond inflows, supportive messaging from central bank officials, and a boost to China's yuan, another top EMFX performer on Friday, from the People's Bank of China's stronger reference rate.

Thailand's Baht Surges, Prompting Calls for Moderation

Thailand's baht surged some 10% against the dollar since the end of June, putting the currency on course for its biggest quarterly gain since the Asian financial crisis. This rapid appreciation has prompted calls from the country's tourism and hotel sectors, as well as business chambers, to temper the rally.

Bank of Japan Holds Steady, Yen Underperforms

Traders also kept tabs on the Bank of Japan as it held borrowing costs steady. The yen underperformed after BOJ Governor Kazuo Ueda signaled there was no urgency on policymakers' part to raise interest rates, lowering the risk of an October hike.

Emerging Market Debt: Diverging Fortunes

In South Asia, Sri Lanka's dollar bonds fell behind its emerging-market peers, with assets set for more losses amid risks to the country's International Monetary Fund loan program after key candidates vowed to renegotiate terms after elections.Meanwhile, India lent the Maldives enough funds for its upcoming Islamic bond payments, easing a default risk for the island nation in the near-term.In Egypt, officials plan to return to international debt markets for the first time since late 2021, selling $3 billion of external debt in different tranches during the fiscal year through June, according to people familiar with the matter.