(Bloomberg) -- Emerging market currencies are on the brink of wiping out all the gains accumulated in 2023 as concerns about China’s economy and US interest rates sour the mood with riskier assets.

The Brazilian real was among the biggest decliners of the day on Wednesday, set for its longest losing streak in more than two years. An MSCI gauge of developing nation currencies, meanwhile, is having its worst quarter of 2023, a slump that has left it trading just 0.1% higher than at the end of 2022. A similar index for stocks already erased a yearly advance last week. 

The expectation the Federal Reserve will keep rates higher for longer amid signs of strength in the economy and doubts about China’s growth outlook have boosted global volatility, leading traders to unwind bullish positions in emerging markets. A rally in crude prices, which hit a one-year high, is further adding to worries. 

“There’s nowhere to hide, really,” Alejandro Cuadrado, the global head of FX & Latam strategy at BBVA, said of the declines. The continued selloff in global rates fueled by oil testing new highs is driving a broader risk selloff in currencies, he added.

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The Brazilian real’s slump over the past seven sessions — 3.9% — is not even the biggest among developing nations. The Hungarian forint and the Colombian peso have slipped at least 4% each, while the Mexican peso is close behind, down about 3%.

Outflows in the real were so heavy over the past few days that they pushed the so-called casado — the difference in points between its spot and the shortest future contract negotiated at the local exchange — into negative territory. That puts the market in what investors call “backwardation,” with spot prices higher than futures even though Brazil has higher rates than the US. It’s a rare occurrence that only happens in times of exacerbated physical dollar demand. 

The real breached both the 5.00 per dollar level, which had been attracting buyers over the last few months, and its 200-day moving average, pacing losses in emerging markets along with the Colombian peso. 

The recent increase in global volatility has also been making currencies less attractive to carry traders as risk of being positioned on those assets rose without being totally compensated by higher returns. The Brazilian real is now offering the lowest carry-to-volatility ratio since January and Mexican peso, widely perceived as a king of carry, is also significantly less attractive.

“The combination of a resilient US economy, a still hawkish Fed, and economic challenges in China is weighing on risk sensitive assets,” said Brendan McKenna, strategist at Wells Fargo. 

--With assistance from Leda Alvim, Giovanna Bellotti Azevedo and Zijia Song.

(Recasts with broader selloff starting in headline)

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