Emerging Market Currencies Fall After U.S. Jobs Surprise Prompts Fed Repricing

US dollars banknotes at a currency exchange store in Kuala Lumpur, Malaysia, on Friday, March. 1, 2024. Policymakers have stepped up their rhetoric to rein in the local currency’s fall after it reached the weakest level since the height of the Asian financial crisis in 1998 last week. Photographer: Samsul Said/Bloomberg

(Bloomberg) -- Emerging-market currencies weakened Friday after US job growth surged above expectations, causing traders to reprice odds the Federal Reserve cuts interest rates in the first half of the year.

Nonfarm payrolls climbed 303,000 last month, the strongest in nearly a year, following a combined 22,000 upward revision to job gains in the prior two months. Following the release, Fed swaps shifted full pricing of a rate cut to September from July and Treasury 10-year yields climbed to the highest in over four months.

A gauge for EM currencies weakened, dragged down by the Chilean peso and the South Korean won. MSCI Inc.'s benchmark for EM equities fell 0.4% and pared this week's gains to less than 0.2%.

This “shifts rate cut expectations further out the curve which will keep the USD strong,” said Brad Bechtel, global head of FX at Jefferies Financial Group Inc.

The roaring data added to risk-off sentiment that already took a toll on assets Thursday afternoon as traders found themselves grappling with inflation concerns after an oil-price spike driven by Middle East tensions and digesting remarks from a Fed official that raised doubts whether the US central bank can cut rates this year.

Fears of an escalation in the Middle East sent oil prices above $90 a barrel for the first time since October. Israel was preparing for a potential retaliation by Tehran after Monday's strike on an Iranian diplomatic compound in Syria. Sentiment was further soured by Fed Bank of Minneapolis President Neel Kashkari, who said Thursday that rate cuts may not be needed this year if progress on inflation stalls.

“The market now knows that some kind of retaliation from Iran will likely come but it doesn't know when and where and what,” said Bjarne Schieldrop, an analyst at SEB Research. “That creates a great discomfort and nervousness.”

The shekel appreciated against the dollar after the US said it welcomes the steps announced by the Israeli government as requested by President Joe Biden to ease the flow of aid into Gaza. Turkish lender Yapi Ve Kredi Bankasi AS jumped 6% after a Bloomberg report that First Abu Dhabi Bank PJSC is studying potential acquisition targets in Turkey including the lender.

WuXi Biologics and other China biotech stocks fell in Hong Kong amid concerns that the impact of the US's Biosecure Act could become more widespread.

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--With assistance from Leda Alvim.

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