Emerging-Market Currencies Gain As Traders See Rate Cuts Ahead

A gauge for emerging-market currencies rose on Wednesday, getting a lift from renewed bets of a Federal Reserve interest-rate cut next week after the latest batch of jobs data showed a weakening labor market. 

The Colombian peso, Czech koruna and Polish zloty led the advance among peers as the Bloomberg Dollar Spot Index slipped 0.4%. Meantime, the index for emerging equities edged lower for the day. 

Private sector payrolls dropped by 32,000 in November, according to ADP Research data released Wednesday, defying the median estimate in a Bloomberg survey of economists that called for a 10,000 gain. The weak figures sent US yields and the greenback lower, offering a boost for developing-nation currencies. 

“As long as the party continues on risk assets, especially equities, it's difficult to fight the carry attractiveness” in Latin American currencies, said Luis Hurtado, a strategist at CIBC in Toronto. “Low volatility and lower UST yields remains a powerful combo.” 

In Latin America, most currencies saw gains versus the greenback. Colombia's peso, which has seen wild swings in recent weeks as traders weigh liability management operations and high carry against a widening fiscal gap and an upcoming presidential election, rose more than 1.2%. 

Investors are also assessing the longer-term policy outlook for the US beyond Jerome Powell's term, which ends in May. Kevin Hassett has emerged as the front-runner to succeed Powell, with President Donald Trump referring to the White House National Economic Council director as a “potential Fed chair.”

“Given perceptions of Hassett as quite dovish, the dollar is a little weaker across the board,” ING Bank NV strategist Chris Turner said in a note. “This could be the dominant theme until next week's FOMC meeting.”

The zloty held onto gains after Polish policymakers cut rates for the fifth-straight time, taking borrowing costs to 4%. Now, the central bank is likely to stay on hold as it awaits for more clarity over the impact of new taxes and fees introduced at the start of the year, said Monika Kurtek, chief economist at Bank Pocztowy SA.  

Meantime, the Indian rupee slipped past the 90-per-dollar psychological level, lagging most peers for the day, as delays in concluding a crucial trade deal with the US continue to dent sentiment.  

In credit markets, the selloff of Ukraine dollar bonds deepened after talks between the US and Russia failed to bring a breakthrough on a plan to end Moscow's war against its neighbor. Ongoing negotiations between the government in Kyiv and holders of the country's growth-linked warrants further weighed on sentiment. The terms that GDP warrant holders secure could affect Ukraine's outstanding bonds, with some investors concerned that existing debt holders may end up in a more disadvantageous position.