Banks shift FX exposure

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    LONDON- A selloff in emerging market currencies deepened on Monday as investors pulled back from stocks and bonds from across the developing world, fearing the rise in US yields and the dollar had further to run.

    MSCI’s emerging market currency index lost as much as 0.8 percent for its biggest daily drop since the pandemic roiled markets in March 2020. The index – which is heavily skewed towards Asian currencies – slipped to a three-month low of just under 1,700 points, Refinitiv data showed.

    While China’s onshore yuan slipped 0.5 percent to turn negative on the year, non-Asian EM currencies such as the Turkish lira, South African rand and Mexican peso weakened more than 1 percent to the dollar.

    Several big investment banks said they were reducing emerging market exposure.

    Morgan Stanley downgraded its view on emerging market currencies and bonds for the second time in two weeks, predicting EM FX would fall 4 percent-5 percent. It encouraged bond investors to switch to safer, investment-grade debt.

    The bank had warned two weeks ago of “downside risks” to its neutral view on emerging currencies and fixed income, citing a slim margin for error due to rising US Treasury yields.

    “It turns out there was no margin for error at all,” said Morgan Stanley strategist James Lord in a note on Monday.

    “We take another bearish step in our positioning and expect the weakness in EM currencies and fixed income to continue, though positive global sentiment should keep the weakness orderly.”

    An emerging equity index is a touch off erasing all its year-to-date gains, losing 2 percent on Monday while JPMorgan’s local currency debt index has returned -5.4 percent since the start of the year and the hard-currency debt benchmark is down 4.6 percent, according to Refinitiv data. – Reuters