The MSCI Latam FX Index jumped 1.1% to hit its highest level since June 10 as the dollar fell sharply as US consumer prices remained flat in July due to a drop in gasoline prices.
Traders are now not predicting that the central bank will undertake a third consecutive 75 basis point hike at its September meeting, but instead opt for a half-point hike. The Brazilian real strengthened to $5.03 per dollar for the first time in nearly two months and last traded at $5.08. Meanwhile, the Mexican peso broke through 20 per dollar for the first time since late June, advancing to a session high of 19.90.
“The (U.S) tightening cycle is unlikely to end soon, but the Fed may opt for a smaller rate hike if there is more evidence that inflationary pressures have eased,” said Piotr Matys, senior FX analyst with InTouch Capital in London. “The selling pressure on the EM currencies should ease accordingly. When markets have the sufficient conviction that rates will not rise further in the U.S., we may witness a proper wave of capital inflows into EM.”
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The prospect of aggressive US interest rate hikes has spurred capital outflows from emerging markets. Still, Latin American markets have remained much more resilient than other emerging markets due to the impact of commodities that have risen this year.
The Colombian peso, linked to crude oil exports, rose 1.8% and the peso of Chile, a copper producer, rose 1.7%, extending gains as a weaker dollar and rising commodity prices. As Wall Street rose, Latin American stock markets rose 2.3%.
Argentina on Tuesday exchanged about 2 trillion pesos ($15 billion) of debt for bonds maturing within 90 days, a milestone for new economy minister Sergio Massa. This policy eases pressure on Argentina’s public finances through a short-term debt swap. At the same time, analysts believe that Argentina’s central bank will likely raise its benchmark interest rate by 600 basis points this week to fight inflation.
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