Payrolls Won’t Buoy Emerging Markets Long If Past Is Guide

  • Currencies jump most in 11 weeks as May payrolls missed target
  • Disappointing jobs reports in past led to shortlived gains

Don’t expect a prolonged rally in emerging-market currencies if history is any guide. In three of the last four times that payroll figures undershot estimates, currency gains were lost within a week.

A gauge of 20 exchange rates rallied 1.4 percent on Friday, the most in 11 weeks, after U.S. jobs data came in worse than the lowest forecasts in a Bloomberg survey. Analysts at UniCredit SpA and UBS Group AG predict the gains will be short-lived.

Weaker-than-expected jobs data are both a blessing and a burden for emerging markets, reducing the likelihood that the Federal Reserve will increase interest rates while also signaling slower growth in the world’s largest economy. Currencies of countries that count the U.S. among their biggest trade partners such as the Mexico and South Africa are most likely to retreat, according to Kiran Kowshik, a London-based strategist at UniCredit.

“When you look at Mexico and South Africa, you tend to see gains reverse quite quickly ” said Kowshik. “There’s already been a massive rally in emerging-market currencies, so you can’t say that they are oversold any more.”

South Africa’s rand strengthened 0.4 percent by 6:20 a.m. in New York, extending a 4.5 percent rally in the previous two days, while Mexico’s peso has been little changed after gaining 0.5 percent on Friday.

Past Performance

In 2015, emerging-market currencies erased gains the week after employers in March added about half the number of jobs than the lowest forecast. In the five days after data showed payrolls in December 2013 were 26 percent worse than the bottom estimate, currencies had dropped 0.9 percent, eclipsing the rally on the day the Labor Department reported the data.

The gauge of 20 currencies gained 0.3 percent on Tuesday after Federal Reserve Chair Janet Yellen said the day before she expects to raise interest rates gradually this year, without specifying a time frame. The index has risen 2.2 percent in three days and is up 4.2 percent this year.

This year’s gains won’t hold because the Fed has indicated that the wait-and-see period for increasing rates is over while China’s growth remains a concern, according to Bhanu Baweja, the London-based head of emerging-market cross-asset strategy at UBS.

Futures traders see a 42 percent probability that the Fed will hike rates in September and a 61 percent chance of an increase after their December meeting, according to data compiled by Bloomberg.

“We don’t believe that emerging-market currencies have reached an inflection point,” Baweja said in a video interview posted on UBS’s website on Tuesday.

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