(Bloomberg) -- An index of emerging-market currencies had its worst drop in a month amid a fresh bout of risk-off as traders wait for Federal Reserve Chairman Jerome Powell’s speech at Jackson Hole Friday.
The Brazilian real, Mexican peso and South African rand led declines Thursday while the greenback advanced along with US yields. Latin American equities slipped for a third session, dragging the developing-world stock index.
The broad EM currency gauge extended losses after data showed applications for US unemployment benefits barely rose last week, in line with expectations. Traders are awaiting remarks from US policymakers to get clues on how much they will lower borrowing cost at their next meeting.
“If Powell keeps a cautious speech, it might not help much,” said Marco Oviedo, a strategist at XP Investimentos in Sao Paulo. “If he acknowledges the economy isn’t doing as poorly as it’s thought to be” and that a recession is less likely, developing currencies will gain, he added.
Boston Fed President Susan Collins said she expects the US central bank to begin easing interest rates soon at “a gradual, methodical pace.” Philadelphia Fed President Patrick Harker said economic data in the coming weeks will help determine the magnitude of the first rate cut.
Brazil’s real touched a session low as Gabriel Galipolo, the director of monetary policy at the central bank, rebuffed investor criticism that the institution has been forced into a corner to hike rates next month, emphasizing all policy options are on the table.
Still, the global risk aversion had weighed down the real earlier, and the swap curve was already steepening after comments by Diogo Guillen, the director of economic policy at the central bank, were regarded as dovish. He said policymakers’ balance of risks — which described more risks of higher inflation — shouldn’t be seen as a guidance to monetary policy.
“Guillen seemed to want to send a more dovish message,” said Gustavo Okuyama, a portfolio manager at Porto Asset, who added that the main driver for local markets was still the external environment.
The Mexican peso, meanwhile, took another leg down after data signaled that double-digit interest rates are cooling the economy. Inflation slowed more than expected in the first half of August, while economic activity data for June was weaker than forecast.
It’s yet another hit for the currency, which has plunged 13% since elections in June amid risks from constitutional reforms, a potential US slowdown and the massive unwind of the so-called carry trade. The slide — the worst in the world after Ethiopia’s birr — has been so unrelenting that investors who’ve tried to buy the dip have gotten burned. Goldman Sachs analysts closed a recommendation to bet on the peso against the euro opened earlier this month. Citi also closed an overweight position on the peso this week.
Meantime, at the Asia open traders will watch Indonesian local markets, which were closed by the time lawmakers abandoned a plan to revise electoral laws that sparked protests. The rupiah had its worst day in two months on Thursday.
--With assistance from Josue Leonel.
©2024 Bloomberg L.P.
