Currencies in the developing world sank after a blowout US jobs report provided the clearest sign yet that the labor market is breaking out of a prolonged period of lackluster hiring, undercutting the case for rate cuts from the Federal Reserve.
MSCI’s emerging-market currency index hit a day’s low following the report, and dropped to its lowest since early April. Mexico’s peso and South Africa’s rand, two bellwether emerging market currencies, erased earlier advances.
“US labor demand is recovering strongly and backs a more restrictive Fed policy stance,” according to Brown Brothers Harriman’s Elias Haddad. “That supports a firmer USD.”
US job growth topped all forecasts in May and the unemployment rate held steady at 4.3%. Nonfarm payrolls increased 172,000 last month after upward revisions to the prior two months, marking the strongest three-month advance in more than two years. The figures boosted bets that the Federal Reserve will consider an interest-rate increase this year in order to contain inflation.
India’s rupee, however, outperformed all its peers. The currency rallied as much as 0.9% after the central bank and government unveiled a “bazooka” package to support the rupee after it plunged to a record low, dusting off a 2013 taper tantrum-era playbook to spur foreign inflows.
Emerging-market equities also slumped on Friday, extending a losing streak to a third day. Asian AI technology companies led losses as Broadcom Inc.’s downbeat outlook for AI-chip sales earlier this week caused jitters among investors.
Emerging market stocks and currencies are now on track for a weekly fall after two weeks of gains.
“Broadcom was the trigger that reminded markets how stretched expectations have become,” said Charu Chanana, chief investment strategist at Saxo Markets. “Investors have priced in a lot of perfection around AI, so even a small disappointment can lead to a pretty sharp reset.”
Risk assets were also pressured by the failure to make progress in talks over an interim peace deal this week between the US and Iran, with the sides seeing their worst clashes since an April ceasefire began and fighting continuing in Lebanon.
Skirmishes continued overnight between Hezbollah and Israel in southern Lebanon after the Iran-backed group rejected a US-brokered proposal aimed at securing a broader truce. Even so, Hezbollah’s attacks on northern Israel have eased, while Israel has held off striking Beirut after threatening to do so earlier this week.
Finally, Ukraine’s dollar debt led bond-market gains ahead of weekend talks between President Volodymyr Zelenskyy and leaders from the UK, France and Germany to discuss negotiations to end the war with Russia.
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