(Bloomberg) -- Mexico’s peso led a relief rally in emerging markets after the Bank of Japan signaled it would be cautious about raising interest rates, easing pressures from a selloff in yen-funded bets on riskier assets.
The currency surged 1.6%, recouping some of the losses sparked by the global market rout on Monday. Indonesia’s rupiah and Brazil’s real also rose sharply. MSCI’s EM equity index climbed 1.9% as investors plowed back into battered tech stocks. The gauge clocked its best two-day rally since November.
In the wake of historic market volatility that started on Friday following the release of soft US data, Bank of Japan Deputy Governor Shinichi Uchida pledged to refrain from hiking rates when markets are unstable, sending the yen about 1.7% weaker against the dollar.
Japan’s message came as a relief for emerging market currencies, since it shows policymakers there are not targeting a stronger yen, said Anders Faergemann, a senior money manager at Pinebridge Investments.
“You could argue that valuations are more attractive now and fundamentals remain supportive, which in itself should curtail further weakness,” he said, though he added investors will likely still be hesitant to jump back into carry trades.
Before Wednesday’s gains, Mexico’s peso had shed around 9% since mid-July in the worst performance among developing market currencies as the yen’s surge exposed hot money flows that quickly reversed.
The Latin American nation’s central bank will decide on borrowing costs on Thursday. Economists are divided on whether policymakers will cut the benchmark rate by a quarter-point or hold it steady.
El Salvador
Bonds from El Salvador were the biggest gainers in emerging markets Wednesday after the International Monetary Fund said it reached “preliminary understandings” with the nation as they negotiate a new lending deal.
In Europe, Polish bonds rallied as expectations of faster and deeper monetary easing in the US fuel bets that Warsaw’s still hawkish policymakers will also tilt toward rate cuts.
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