Emerging-market stocks and currencies are on track for their largest weekly decline since the 2020 pandemic. The MSCI Emerging Markets Currency Index has fallen approximately 1.4% this week, while the equity index has dropped more than 6%. Both are poised for their worst weekly performance since March 2020. Soaring oil prices—Brent crude futures climbed to their highest level since July 2024 this week—continue to pressure the outlook for emerging-market currencies. Analysts at Citi noted, "We have significantly reduced risk exposure in recent days, but will re-establish long positions in emerging markets if signs of stabilization emerge. While there are early indications of oil price stability, it is too soon to conclude that the price trend will mirror the pattern seen after the outbreak of the Russia-Ukraine war in 2022." This week, safe-haven demand has driven declines in all emerging-market currencies against the U.S. dollar. Market attention is particularly focused on the currencies of net oil importers, concentrated mainly in Asia, and their impact on domestic inflation. The central bank governor of the Philippines stated in an interview on Friday that oil prices reaching $100 per barrel could necessitate tighter monetary policy, as inflation may exceed the central bank's target range. On Tuesday, the South Korean won recorded its largest single-day decline since 2009, with investors warning of imminent forced deleveraging and liquidation risks. Volatility in emerging-market currencies has also surged significantly, with JPMorgan's emerging-market foreign exchange volatility index rising above comparable measures for G7 currencies this week. Beyond tensions in the Middle East, investors are also monitoring the release of U.S. nonfarm payrolls data for clues on the Federal Reserve's interest rate trajectory.
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