EM Currencies Post Second Day of Losses On Stronger Dollar, Oil

(Bloomberg) -- Emerging-market currencies were down for a second day on Wednesday, as the dollar rebounded and Latin American markets got hit by commodity prices and political noise.

MCSI Inc.’s emerging-market currencies index posted a second day of losses, with most currencies down for the day. Among exceptions was the Mexican peso, which trimmed an earlier rally after two opposition senators joined the ruling coalition, moving the government closer to the supermajority needed to change the constitution.

The peso had climbed as much as 1.7% on Wednesday before paring gains. Although the currency still closed on positive territory, Mexico’s dollar notes slid across the curve and were the worst performing sovereign bonds across emerging markets on Wednesday.

The rest of Latin American currencies also had a bad day, with the Colombian peso leading losses in emerging markets, weakening by almost 1.5% on falling oil prices. It was followed by the Brazilian real, which extended its decline after President Luiz Inacio Lula da Silva chose Gabriel Galipolo as the next central bank chief, cementing the administration’s influence over the institution.

“It was a risk-off day and that dominated currencies in Latin America,” said Marco Oviedo, a strategist at XP Investimentos in Sao Paulo. “That also showed in the BRL, CLP and COP, because both the US dollar and rates went up. I think it was a day of taking profit or larger risk aversion.”

Traders are now focusing on fresh US economic data that could shed light on the outlook for Fed interest rate cuts.

“There is some recognition that the US economy is neither in recession nor on the brink of recession, and the Fed may not have to be moving in 50 bps clips come September, November,” said Brendan McKenna, an emerging markets economist and FX strategist at Wells Fargo. “So markets, at least today, are pricing a more gradual pace of Fed easing, pushing the dollar higher and most of EM FX weaker.”

Even as money markets price in 100 basis points of interest-rate cuts by the Fed this year, investors remain on alert for renewed strength in the greenback given the risks surrounding the US presidential election and global geopolitics.

The MSCI Emerging Markets Index was down 0.2% while investors assess the impact Nvidia’s results amid a raging debate over whether companies investing in artificial intelligence will realize the promised profit upsides quickly enough. Nvidia’s revenue forecast fell short of some of the most optimistic estimates, stoking concerns that its explosive growth is waning.

“With plenty of focus on Nvidia’s earnings — some say are more important than remarks from Federal Reserve Chair Jerome Powell — it’s worth noting that this critical stock sets the tone for the entire tech sector and other asset classes,” said Piotr Matys, a senior analyst at InTouch Capital Markets.

Elsewhere, the Polish zloty led the decline in Europe after the government proposed a looser budget for 2025.

The Turkish lira traded slightly weaker against the dollar. A brief and sudden plunge in the currency during Asian hours left traders scratching their heads and rushing to cut losses, before the currency settled on a more predictable path.

Meanwhile, Israel’s central bank held interest rates steady at 4.5%, in line with estimates, in an effort to balance a weakening economy against inflationary pressures as war spending surges.