EMERGING MARKETS-FX mixed as markets assess US-China tariff tit-for-tat

By Purvi Agarwal

Feb 4 (Reuters) - Emerging market currencies were mixed on Tuesday as investors weighed the impact of escalating trade war concerns after China's retaliatory tariffs on the U.S., while stocks soared after the U.S. agreed to pause tariffs on Canada and Mexico.

MSCI's index tracking global EM currencies .MIEM00000CUS recovered 0.3%, after logging its worst day in over a month on Monday.

China ordered retaliatory tariffs on some U.S. imports and expanded mineral export controls, in response to the new 10% duties on Chinese goods by the U.S. that came into effect on Tuesday, renewing a trade war between the world's biggest economies.

The offshore yuan CNH=D3 was trading flat after briefly touching a record low on Monday. Mainland Chinese markets were closed for a long holiday and will reopen on Wednesday, with investors closely watching the central bank's daily currency guidance for possible clues on Beijing's broader trade policy intentions.

Most Asian currencies were higher against the dollar on the day, recovering from Monday's declines after U.S. President Donald Trump's threatened Feb. 1 tariffs came into effect, unsettling markets globally.

However, Trump's last-minute decision to pause tariffs on Mexico and Canada for a month after the countries came to a border security agreement led EM assets to regain much of their lost ground later in the session.

The Mexican peso MXN= was 0.4% lower, while the loonie CAD=D3 was down 0.1% on the day.

The tit-for-tat measures and Trump's changing stance on tariffs has left investors uncertain about the outlook for emerging economies, with policy divergence between the U.S. Federal Reserve and other central banks only compounding pressures.

"Markets are not fully pricing out the tariff threat just yet because tariffs have been only delayed by a month and the roller-coaster of trade news leaves markets with a higher degree of unpredictability," ING analysts said in a note.

Analysts at Ashmore said that they see a chance of a negotiated reduction in tariffs in coming days.

Stock indexes, on the other hand, cheered the U.S. pause on measures against Canada and Mexico, with the MSCI stocks gauge .MSCIEF up 1.6%, on track to claw back most of its losses from Monday.

Philippine stocks .PSI added 3.5% while Turkey's BIST 100 .XU100 was up 0.3%. Indexes in South Africa .JTOPI and Czech Republic .PX advanced 0.6% and 0.7% respectively.

The rand ZAR=, however, weakened 0.2% against the greenback, on track for its fourth session of declines. Trump's plans to cut funding for the country led to turbulent trade on Monday.

Data showed the non-oil private sector in Egypt put up its best performance in over four years, and the one in Saudi Arabia expanded at its strongest pace in just over a decade.

Most emerging Europe currencies were subdued against the euro, but the Polish zloty EURPLN= depreciated some 0.2%.

HIGHLIGHTS:

** India's central bank seen cutting rates for first time since May 2020

** Poland needs to cut spending and raise taxes, OECD says

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