EM Currencies Cap Week of Gains as Traders Assess Fed Cut Impact
Next week, traders will turn their attention toward a spate of key data releases in the US.
(Bloomberg) -- A gauge of emerging-market currencies notched an eighth week of gains even as the risk-on mood sparked by the Federal Reserve’s rate cut wavered.
The Brazilian real and Mexican peso trailed most peers Friday, leaving an MSCI index for emerging-market FX flat for the day. Still, the gauge — which also includes interest earned on those currencies — capped an eighth straight week of advances. A companion index for EM stocks rose 0.6% and ended the week some 2% higher.
Mideast tensions brewed and the euphoria following the Fed’s half-point rate cut faltered amid diverging comments from Fed governors. Christopher Waller said it was favorable inflation data that drove his support for the Fed’s half-point cut this week. Michelle Bowman, the lone dissenting voice against the larger cut, said the move was declaring victory over inflation too early.
“It’s been a choppy day. You had risk on exhaustion with Middle East tensions and then you had two Fed speakers give diverse comments,” said Jayati Bharadwaj, a strategist at TD Securities. “Markets lack much clarity on the next Fed move and need to wait for the next labor market report for more clarity.”
Next week, traders will turn their attention toward a spate of key data releases in the US that will offer more clues as to whether rate-setters will be able to pull of a soft-landing of the world’s largest economy.
Currency Moves
In Latin America, Brazil’s real slipped and snapped a six-day rally, while swap rates jumped a second day amid renowned concerns over the country’s fiscal outlook ahead of a budget report set to be released later on Friday.
The Mexican peso also took a dip as traders wagered that the Fed’s large cut will signal further easing from Mexico’s central bankers at their Sept. 26 meeting, which may chip away at the peso’s appeal.
In Asia’s FX markets, Indonesia’s rupiah was one of the biggest gainers on the back of rising bond inflows, supportive messaging from central bank officials and as China’s yuan — another top EMFX performer on Friday — received a boost from the People’s Bank of China’s stronger reference rate.
Thailand’s baht surged some 10% against the dollar since the end of June, putting the currency on course for its biggest quarterly gain since the Asian financial crisis. The baht’s gains have prompted calls from the country’s tourism and hotel sectors, and business chambers to temper the rally.
Traders also kept tabs on the Bank of Japan as it held borrowing costs steady. The yen underperformed after BOJ Governor Kazuo Ueda signaled there was no urgency on policymakers’ part to raise interest rates, lowering the risk of an October hike.
Credit Markets
In South Asia, Sri Lanka’s dollar bonds fell behind its emerging-market peers. There, assets look set for more losses amid risks to the country’s International Monetary Fund’s loan program after key candidates vowed to renegotiate terms after elections.
Meanwhile, India lent the Maldives enough funds for its upcoming Islamic bond payments, easing a default risk for the island nation in the near-term.
In Egypt, officials plan to return to international debt markets for the first time since late 2021, selling $3 billion of external debt in different tranches during the fiscal year through June, according to people familiar with the matter.
