(Bloomberg) — Latin American currencies lagged their emerging-market peers on Tuesday amid broad risk-off sentiment across global markets ahead of the release of key US inflation data on Wednesday.
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The benchmark MSCI EM currency index fell for a second consecutive session, dipping 0.2%. The Brazilian real, the Colombian peso and the Mexican peso led losses on a day marked by a strong dollar and domestic issues in various countries that weighed on investors’ mood.
“For these currencies, it is mostly a global story,” said Mark McCormick, global head of FX and EM strategy at TD Securities. “Risk sentiment is souring, given the market has likely overpriced the Fed easing, with 25bps looking much more likely than 50bps now.”
Ahead of the Federal Reserve’s rate decision on Sept. 18, investors are on the lookout for any last bits of data that could provide them with clues about the pace of rate hikes. Among those: Wednesday’s consumer price index reading, which is expected to solidify bets on how the Fed will conduct its easing cycle ahead.
Market participants are continuing to digest the latest US non-farm payroll figures — released Friday — as they look to forecast the size of potential interest rate cuts for the upcoming Fed meeting.
In equities, emerging-market stocks fell nearly 0.1% on Tuesday, dragged lower by Samsung Electronics Co. and Tencent Holdings Limited. The MSCI EM index is down about 3.4% in September, which would make it the worst month since January for developing markets.
Latin America
The Colombian peso traded lower than its peers for a second straight day, as oil prices fell and lower-than-expected inflation data published on Friday supported investor expectations around faster monetary easing. Hopes that the central bank will accelerate rate cuts during its September meeting pushed the country’s currency to its lowest level since October 2023.
In Mexico, traders are bracing for further volatility across asset classes as a controversial judicial reform bill needs just one more vote in the Senate to pass. The last-minute replacement of a Mexican senator from an opposition party as well as allegations that another senator had been arrested fueled suspicion about potential moves by the governing Morena party to ensure it had the votes to pass President Andres Manuel Lopez Obrador’s judicial overhaul.
Over the past few weeks, investors have sold off the peso and other Mexican assets as the reform bill advanced, pushing the currency past 20 pesos per dollar. On Tuesday, the peso fell 1%.
Tonight’s US presidential debate between vice president Kamala Harris and former president Donald Trump could also fuel more volatility, given Mexico’s proximity to and its trade ties with the US.
“For MXN, the local story isn’t helping for sure, especially in the context of the US election,” McCormick said. “Mexican assets have a relatively large share of foreign ownership, so the political shift and associated policies aren’t exactly working against the negative macro headwinds for MXN.”
In Brazil, the latest economic data showed the nation’s annual inflation eased roughly in line with expectations in August. While the decline acts as a relief to an economy that’s growing robustly, it will likely not be enough to stop central bankers from lifting interest rates when they gather next week. Short-end swap rates fell as traders reinforced bets of a 25 basis points rate hike next week.
China Jitters
Meanwhile, China’s export data surprised to the upside but barely registered with investors amid pessimism over the world’s second biggest economy and losses in the property sector.
A benchmark index of the nation’s onshore shares traded near its lowest levels since January 2019. Down almost 7% this year, the CSI 300 Index is facing its fourth annual drop, while an MSCI Inc. gauge of Chinese stocks is heading for its longest stretch of underperformance versus global equities since the turn of the century.
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