Emerging-market stocks and currencies surged Tuesday as fears of a full-blown trade war eased. President Donald Trump agreed to postpone 25% trade levies on Canada and Mexico in exchange for tighter border security, while China delivered a measured response to newly imposed U.S. tariffs. The news fueled a strong rebound in riskier assets, with developing-world stocks posting their biggest gain since September.
Emerging-Market Currencies Surge, Except the Mexican Peso
The rally was most evident in emerging-market currencies, which climbed as the U.S. dollar weakened. However, the Mexican peso, despite an initial outsize rally following the tariff pause, lagged behind its peers, weakening as much as 0.8% during Asian trading.
Meanwhile, Mexico’s stock market surged 2% after reopening from a local holiday, benefiting from improved sentiment.
“The assumption in markets seems to be that the issue is resolved and we can all move on,” wrote Brad Bechtel, head of global FX strategy at Jefferies. “We have to remember it is a 30-day pause and Trump is Trump, so I would expect the fireworks are far from over.”
Federal Reserve Policy Provides Additional Support
Risk assets found another tailwind after data showed that U.S. job openings declined more than expected. This raised hopes that the Federal Reserve could resume interest rate cuts sooner than anticipated, adding to the momentum in emerging markets.
Commodity-Driven Currencies Lead the Charge
The Chilean peso was the biggest winner among Latin American currencies, reaching its highest level since December. The move coincided with a rally in the price of copper, Chile’s primary export. Investors saw China’s targeted retaliatory tariffs—which included higher duties on select U.S. goods—as a calculated move to avoid escalating tensions further.
In Asia, the Korean won and Singapore dollar led the advance, while the offshore yuan held near a record low against the dollar. The full impact of China’s tariff response will become clearer when its markets reopen on Wednesday after the Lunar New Year holiday.
Turkey and Panama in the Spotlight
The Turkish lira weakened slightly against the dollar, though Finance Minister Mehmet Simsek expressed optimism, stating that inflation-adjusted gains would continue. “Bringing down the inflation rate is really the key,” he emphasized.
Meanwhile, Panama’s dollar bonds extended gains after reports surfaced that the nation is considering canceling its contract with a Hong Kong-based company that operates ports near the Panama Canal. The move was seen as a potential concession to the U.S. amid Trump’s warnings about countering China’s influence in the region.
Strong Gains for Egypt and Ukraine
Egyptian debt posted some of the strongest gains among emerging markets after the country secured $1.5 billion in funding for oil and food security from the International Islamic Trade Finance Corp.
Similarly, Ukraine’s dollar bonds rallied after Trump signaled interest in striking a deal with Kyiv that would include access to rare-earth minerals, a critical resource for global technology and defense industries.
Conclusion
While trade tensions have de-escalated for now, the 30-day pause on tariffs leaves markets on edge. Emerging-market assets are enjoying a rebound, bolstered by a weaker U.S. dollar and expectations of further Federal Reserve rate cuts. However, with Trump’s unpredictability and China’s long-term strategy still in play, the risk of renewed volatility remains high.
