Emerging-Market Debt Joins Global Selloff on Slower US Easing Bets

(Bloomberg) -- Emerging-market currencies traded mixed as US election uncertainty and a global economic slowdown added to concerns over potentially slower-than-expected Federal Reserve interest rate cuts.

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Asian currencies dragged the MSCI currency gauge lower even as the Chilean, Mexican and Colombian pesos gained. Emerging currencies are contending with a dollar that is expected to strengthen in the weeks ahead.

“Investors will continue to navigate the bumpy road toward the US election with a USD bias,” said Alejandro Cuadrado, head of global FX and Latin America strategy at BBVA in New York.

Traders are dialing back bets on aggressive US rate cuts given the economy remains robust and Fed officials this week sounded a cautious tone over the path of easing. Rising oil prices and the prospect of bigger fiscal deficits after the US presidential election are also adding to concerns.

“Developments in US politics remain a major source of concerns for emerging markets, especially those economies that mainly rely on global trade, which could be significantly impacted if former President Donald Trump returns to the White House,” said Piotr Matys of InTouch Capital Markets.

At the center of election bets in Latin America is the Mexican peso, which posted gains for the first time in three days while investors continued to wager on the potential damage of a Trump presidential win in the US.

Despite fears around the peso’s performance, Mexico’s economic conditions are still enviable, said Juan Perez, director of trading at Monex USA. “The US economy is strong and Mexico is the one that benefits the most from that constant growth,” he said.

Emerging market stocks also took a hit, with MSCI’s equity gauge closing lower for a second-straight session, capturing the broader risk-off sentiment.

Slowing Growth

Meanwhile, the International Monetary Fund lowered its global growth forecast for next year. Global output will expand 3.2%, 0.1 percentage point less than a July estimate, the IMF said in an update of its World Economic Outlook released on Tuesday.

“Emerging markets are more negatively affected in this moment because the IMF lowered it’s growth forecast for 2025,” which could indicate a need for more monetary stimulus, Perez said.

Elsewhere, Hungary’s central bank kept its key interest rate unchanged after the forint’s recent drop eliminated the room for continued monetary easing.

The rand touched its strongest levels in two weeks ahead of South Africa’s inflation data on Wednesday, which is expected to show annual inflation eased by 0.4%, strengthening the case for another rate cut at the central bank’s November meeting.

Zambia is considering a debt-for-nature swap to keep reducing its overseas obligations, according to Finance Minister Situmbeko Musokotwane.

Sri Lankan authorities attending the IMF meetings in Washington this week are discussing the nation’s debt restructuring with international bondholders, according to a cabinet spokesperson.

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