Emerging market currencies rose in September, rebounding from the biggest drop in more than seven years, but remain down for the year amid a challenging environment related to the U.S.-China trade war and a global economic slowdown.
The MSCI International Emerging Market Currency Index rose 0.79% during the month, following a 3.3% decline in August that was the biggest since May 2012. The index fell 2.5% in the third quarter, the most since the second quarter of 2018, and was 0.4% lower in the year through September.
The Russian ruble led emerging market currencies higher in September after an attack on two Saudi oil production sites sent crude prices soaring and the central bank cut key rates for the third time this year.
Brent crude oil futures surged as much as 20% on Sept. 16 in wake of the attack on Saudi oil production, boosting currencies of oil exporting countries. The ruble appreciated 3.7% against the dollar in the month ended Sept. 30, and its outlook remains favorable due to stronger fundamentals which will allow the currency to outperform in the rest of the year, Jonas David, emerging markets strategist at UBS Global Wealth Management, said in an interview.
"The main risks to our positive view on the ruble are additional sanctions and a further deterioration in the global growth outlook, pulling down oil prices," David and UBS Analyst Tilmann Kolb said in a research note.
The Turkish lira gained 2.86% versus the dollar in September as the Türkiye Cumhuriyet Merkez Bankası AS lowered key rates less aggressively than markets were anticipating, in line with President Recep Tayyip Erdoğan's calls to ease monetary policy despite high inflation rates in the country.
"It looks like the market has accepted these big cuts to a large extent because inflation has come down," Nordea Markets Analyst Morten Lund said in an interview. Lund noted that inflation in the country could ease further in October.
Meanwhile, Turkey's 12-month rolling current account surplus reached the highest level since early 2002 during September, helping the lira.
The Argentine peso strengthened 3.44% versus the dollar during September after President Mauricio Macri's government reintroduced capital controls to support the currency which had spiraled into a freefall during August, though the recovery was not nearly enough for the peso to end the third quarter in positive territory.
The peso fell heavily after opposition candidate Alberto Fernández secured a significant lead over incumbent President Macri in a primary election Aug. 11, losing 26.19% in the third quarter.
The Brazilian real dropped 7.79% against the dollar in the third quarter and markets are expecting further depreciation to 4.0 reais per dollar by the end of 2019, according to a weekly survey by the Brazilian central bank at the end of September. A 50-basis-point rate cut from Banco Central do Brasil on Sept. 18 may be followed by more stimulus this year, the bank hinted.
Brazil's pending pension reform remains a significant factor driving the real as it appears to be falling short of market expectations, said Lund. The real also stands the risk of contagion from the crisis in Argentina and trade tensions in China, two of Brazil's major exporting destinations, while domestic growth outlook is still "not very good," Lund added.
Elsewhere, the Hungarian forint (-7.28%), Colombian peso (-7.15%), Polish zloty (-6.79%) and South African rand (-6.49%) were also among the worst-performing emerging market currencies during the third quarter.