Mexico’s peso fell and emerging market stocks lost some traction on Wednesday, after US President Donald Trump revived threats to build a border wall and terminate the NAFTA trade treaty.
Suggesting that scrapping NAFTA might jumpstart current renegotiations, Trump said at a political rally in Arizona 150 miles (240 km) from the Mexican border: “I personally don´t think you can make a deal without a termination,” ABC News reported on Wednesday.
It sent the peso, which has rallied 17% this year on hopes that Trump’s threats will not materialize, down 0.6% against the dollar, even as the greenback itself fell against the major FX pairs.
Turkey’s lira, Russia rouble and South Africa’s rand dropped between 0.1 and 0.3% too.
MSCI’s widely-tracked EM stocks index lost momentum too, though a 0.4% rise in Indonesia after an interest rate cut and a 6-year overnight high for Brazilian shares kept the index just about positive.
“For the peso, the market had largely priced out any risk of trade protectionism, which is why you have seen a very strong rally (this year),” said UniCredit EM FX strategist Kiran Kowshik.
“But with Trump up against the wall, finding it tough to do anything on the likes of tax reform, he is looking for other things to do. So you´ve seen sanctions against companies in Russia, and now there is more hardline rhetoric on the trade side.”
“So this could see the peso come under a bit of pressure as the market assumed there would be no trade frictions.”
Traders were also waiting for Thursday’s start of the Jackson Hole conference of top central bankers, which includes Fed head Janet Yellen and ECB President Mario Draghi and could provide clues on where global interest rates are heading.
Emerging market stocks, bonds and currencies have been many of this year’s top global performers as borrowing costs and the dollar have stayed low, so any sign a change is on the horizon could unnerve investors.
For now, though, things look rosy.
The average yield on EM local currency denominated debt was at a more than 2-1/2 year low of just above 6% on Wednesday. EM stocks are up almost 25% for the year and government bonds have made almost 8%.
Overnight Asia moves saw the Thai baht edge lower after its custom-cleared annual exports fell short of expectations.
The Malaysian ringgit inched down after its consumer price index rose at a slower pace for the fourth month in a row, while Tuesday’s surprise Indonesian rate cut nudged the rupiah lower too.
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