EMERGING MARKETS: Global Risk-Off Factors Prompt Additional Weakness in EM FX

A number of risk-off factors are working against emerging market currencies this morning, with MXN and ZAR particular underperformers.

• European and UK earnings were weak across the board, prompting a solid move lower for Eurostoxx 50 futures through a key support level. This has added to broader equity weakness after disappointing tech earning earlier this week.
• Further JPY short-covering has also contributed to the risk-off tone, as carry trades continue to be unwound. HUFJPY is down 1.2% at typing, through the June lows and at its lowest level since Apr 23. ZARJPY sits 1.7% lower, extending the pullback from the mid-July highs to an impressive 8.2%.
• An unexpected 20bp cut to the PBOC’s one-year MLF rate has been unable to shift sentiment in China, with the MSCI China Index falling as much as 1.2% overnight. In addition, further weakness in metals prices, with copper and iron ore down as much as 1% each, has acted as a further headwind to the wider EM basket.
• In CEE, a more dovish policy mix in Hungary following the 25bp rate cut on Tuesday has underpinned HUF underperformance, with EURHUF over 1% higher compared to pre-NBH levels, and with losses for the forint far exceeding that of the Polish zloty and Czech koruna in the same time frame.
• Gains for USDMXN have stretched to 2.4% on the week, with the pair flirting with 18.50 at typing. Given the yen is one of the main funding currencies for carry trades in LATAM, its rally is prompting a substantial retreat from bullish positions in the region.