Emerging market currencies continued to rebound in July, logging their best month against the U.S. dollar this year as they reaped benefits from the persistent broad weakness in the dollar and positive developments in their domestic markets.
The MSCI International Emerging Market Currency Index, which measures the performance of 26 currencies from emerging economies relative to the U.S. dollar, rose 1.4% in July to mark a third straight month of increase, which was the largest since December 2019.
"[Emerging markets] not only stabilized but also began to gain back substantial ground on an aggregate basis, away from extreme April lows much more quickly than we had expected," emerging markets strategists at TD Securities wrote, noting that the U.S. dollar "remains the key variable for the direction and magnitude" of emerging market currency movements. The dollar had its worst month in 10 years against a basket of developed-market currencies.
Fifteen of the 21 emerging market currencies tracked monthly by S&P Global Market Intelligence also posted gains in July, with the Chilean peso jumping nearly 8% against the dollar to lead the rally, buoyed by enactment of a pensions withdrawal bill. The legislation allows Chileans to withdraw up to 10% of their private savings, translating to a potential injection of $17.5 billion to $20 billion into the domestic economy, according to Oxford Economics.
"We think that the bill could be positive for [the peso] to the extent that local pension funds decide to liquidate foreign assets and repatriate those funds to cover some of the withdrawals," Morgan Stanley Research said in a note.
Currencies from Central and Eastern Europe, or CEE, were also among the top performers in July, with the Hungarian forint, Polish zloty and Czech koruna climbing 7.7%, 6.6% and 6.4%, respectively, as EU member states agreed on a €750 billion coronavirus pandemic recovery fund.
"As the new EU wide funding means lower downside risks to the CEE key export market and higher odds of a synchronized EU recovery, this is clearly a positive for CEE [currencies]," economists at ING said in a note.
The forint also received a boost from the Hungarian central bank, which signaled on keeping interest rates away from zero after delivering in June its first rate cut in four years, according to ING.
The Brazilian real and Mexican peso reversed losses from June, rising 3.6% and 3.1%, respectively, as the countries led Latin America's attempt at recovery from the coronavirus crisis. Mexico's economy is only 4% below its pre-pandemic activity level, while Brazil is 7% below its late-February levels, Oxford Economics said.
In Brazil, the real's gains also coincided with a resurgence in economic reform talks, Oxford Economics noted. The government on July 21 outlined the first phase of its tax reform plan and hinted of more proposals in the future.
A number of Asian currencies extended gains in July, with the Singapore dollar rising 1.5% to lead the pack, reflecting their increased sensitivity to the U.S. dollar's weakness, according to TD Securities. "Asian currencies have even managed to strengthen at a time when portfolio flows have weakened, due in part to narrowing current account deficits in some countries as imports have collapsed amid trade weakness," TD Securities wrote.
The Chinese yuan climbed 1.4% as incoming data continued to point to a firmer domestic economic recovery in the second half of 2020, strategists at UOB Group said, warning that escalating geopolitical tensions would keep the yuan's gains in check.
The Russian ruble was the worst-performing currency in the S&P Global Market Intelligence basket in July, falling 4.7% following previous interest rate cuts and amid the further decline in U.S.-Russia relations, which has reignited concerns over fresh sanctions. The increasing odds of a Democratic victory in the U.S. presidential election also poses downside risks to the ruble, according to MUFG Bank.
The Turkish lira dropped 1.7% against the dollar after Turkey recorded its highest current account deficit levels since the first half of 2018, when it grappled with a currency crisis. "If the lira continues to weaken, it will begin to increase pressure on the [central bank] to reverse rate cuts," MUFG Bank wrote. "In these circumstances, we expect the lira to continue weakening in the year ahead."