Emerging Market Currencies, Debt Weaker On Lower Confidence

Emerging market currencies and debt were weaker Tuesday, in a return to broad concerns about slowing global growth and rising oil prices.

Emerging markets started the day with concerns about China's weakening economy and another increase in its local oil prices. The dollar, which has been on a winning streak against emerging market currencies, is expected to continue its run on the back of a U.S. economic recovery.

"It's bit of a challenging environment for emerging currencies right now, and possibly for the rest of this year," says Guillaume Salomon, strategist at Societe Generale.

Earlier this year, all emerging market currencies rallied--but investors don't have such a broad-based confidence anymore.

"Now, there's going to be greater differentiation between emerging markets," he said. These days, investors like the Mexican peso and Polish zloty, and are staying away from the South African rand, the Turkish lira and the Hungarian forint.

Late afternoon in New York trade, the dollar was up more than 1% on the South African rand at ZAR7.6220 and 1.1% against the Turkish lira at TRY1.8243, according to CQG data.

The Brazilian real weakened sharply in the morning as investors reacted to the news of that country's Treasury Department repaying up to $15 billion in dollar bonds this year. This pushed the currency to BRL1.8345 on the dollar, but it has snapped back to trade at BRL1.8213 on the dollar, according to CQG data. Late afternoon, the central bank was in the spot market buying dollars at BRL1.8210.

"The Brazil move is part of a coordinated effort to stem the appreciation of the real," said Flavia Cattan-Naslausky, strategist with RBS. Market consensus also moved to accept the real's new normal rate to be BRL1.80 on the dollar rather than the previous BRL1.70.

The Mexican peso is trading on the dollar at MXN12.6625. But earlier in the afternoon, a 7.6 magnitude earthquake pushed the rate to MXN12.7035.

Meanwhile, emerging European currencies also weakened modestly against the euro.

The zloty, despite a stronger outlook for Poland's economy, was trading on the euro at PLN4.1224 and the forint at HUF290.10, according to CQG data.

Emerging markets sovereign bonds were a tad weaker with the J.P. Morgan Emerging Market Index Global trading two basis points wider at 317 basis points over comparable Treasury yields.