A disappointing US jobs report sent the dollar lower and lifted emerging-market stocks and currencies, as markets reduced bets on aggressive Fed rate hikes.
The iShares MSCI Emerging Markets ETF (EEM) rose as a softer dollar lifted risk appetite and made EM stocks more attractive. The fund tracked gains in the underlying MSCI EM Index, with broad-based buying across sectors.
A combination of dollar weakness and improved risk sentiment after soft US jobs data fueled inflows into the emerging-market ETF.
EEM faces resistance near $42; a break above that level could signal further upside. Support sits at $40.
Soft US jobs data sapped expectations for aggressive Fed tightening, sending the dollar lower. DXY fell as traders priced in fewer rate hikes, weakening the greenback against a basket of major currencies.
The weaker data reduced the odds of further aggressive rate hikes by the Fed, which diminished the dollar’s yield advantage and led to a broad sell-off.
If US data continues to soften, DXY could test lower support levels around 100. However, a hawkish Fed surprise or strong data could quickly reverse the move.
The Mexican peso strengthened sharply as the dollar retreated, a direct response to soft US labor data that reduced the relative attractiveness of the greenback. USD/MXN slid as EM currencies rallied broadly.
The peso rallied over 1% against the dollar, with USD/MXN dropping below key levels as the greenback slumped.
The pair is testing support at 17.50, and a sustained break below could open the door to 17.00.
The Brazilian real gained as the dollar fell on soft US jobs data, boosting demand for higher-yielding EM currencies. USD/BRL retreated from recent highs as capital flows shifted toward Brazil.
The pair could test 4.80 if the dollar continues to weaken, but any uptick in US yields or risk aversion could halt the decline.
Weaker US data lowers the opportunity cost of holding Brazilian assets, attracting carry trade flows into the real and other EM currencies.
Emerging-market stocks and currencies rallied after a softer-than-expected US jobs report weakened the dollar and scaled back Federal Reserve tightening expectations. The MSCI Emerging Markets Index rose as risk appetite improved, with the Mexican peso and Brazilian real leading gains. Traders now price in fewer rate hikes, boosting demand for higher-yielding EM assets.
The report came in weaker than expected, indicating slower job growth and raising concerns about the economic outlook.
Softer jobs data reduces the likelihood of aggressive Fed rate hikes, weakening the dollar and making higher-yielding EM assets more attractive to global investors.
It depends on whether US data continues to soften and the Fed’s response; if recession fears escalate, EM assets may face headwinds despite a weaker dollar.