06:11 AM EDT, 06/25/2024 (MT Newswires) -- Political risks remain a near-term driver for emerging market currencies that continue to trade close to year-to-date lows against the U.S. dollar, noted Mitsubishi UFG.

The worst-performing emerging market currencies so far this year have been Turkey's TRY (-10% versus USD), Brazil's BRL (-9.9%), South Korea's KRW (-7.2%), Chile's CLP (-7.1%) and Thailand's THB (-6.8%), wrote the bank in a note to clients. Russia's RUB (+2.6% versus USD) and South Africa's ZAR (+1.6%) are the only two emerging market currencies that have strengthened against the USD.

Over the past week performances have been more mixed. The best performer has been Mexico's MXN (+2.7% versus USD), which has started to rebound following the sharp post-election sell-off. The price action supports MUFG's view that the scale of the MXN sell-off was overdone due to heightened concerns over constitutional reform in Mexico.

In contrast, the RUB and TRY have weakened the most against the USD over the past week.

The USD has strengthened for three consecutive weeks even as United States yields have been correcting lower. The 10-year U.S. Treasury (UST) yield has been consolidating at just above 4.20% over the past week after hitting a high of 4.74% in late April, stated the bank. The release in the week ahead of the latest US PCE deflator report for May is expected to provide further confirmation that core inflation has slowed in recent months.

It has given MUFG more confidence that the US Federal Reserve will be able to deliver multiple rate cuts in H2 of this year. US economic data continue to surprise to the downside including the recent pick-up in initial claims pointing towards a softening of growth momentum.

However, it has been offset by negative developments outside of the US, added the bank. Within Europe, Middle East and Africa (EMEA) foreign exchange, the Central European currencies of the Czech Republic (CZK), Hungary (HUF) and Poland (PLN) have underperformed since French President Emmanuel Macron called a snap election with the first round set to take place this Sunday.

It has helped to lift EUR/CZK and EUR/HUF up to the 25.000 and 400.00 levels respectively, pointed out MUFG. The PLN has been quicker to stage a tentative rebound over the past week after EUR/PLN failed to sustain levels above 4.3500 and dropped back below 4.3000 on Monday. The Central European currencies could yet weaken further in the week ahead if Marine Le Pen's far-right RN party and the "Popular Front" alliance of left-wing parties both make it through to the second round of the French parliamentary elections.