Emerging-market currencies surged to their highest levels since May after US consumer prices unexpectedly declined in June, bolstering expectations for an imminent interest rate cut by the Federal Reserve.
Leading the advance were the South African rand and the Korean won, which propelled the developing-world currency index 0.2% higher as the US dollar weakened. The broad equity index closed at its highest level in two years, with the two largest US-listed exchange-traded funds tracking it also up for the session.
US consumer prices dropped 0.1% in June, while the core measure, excluding food and energy, recorded its lowest monthly increase since August 2021. These figures increased the likelihood of a third Fed rate cut this year, as indicated by swaps market pricing.
“This is very positive for emerging markets,” said Marco Oviedo, a strategist at XP Investimentos in Sao Paulo. “It provides the Fed with a reason to cut rates sooner than expected.”
This scenario overshadowed the significance of easing monetary policies elsewhere, following inflation data from Hungary, the Czech Republic, and Romania that supported the case for rate reductions.
Latin American Currencies and Carry Trades
Despite an increase in risk appetite, Latin American currencies underperformed, trimming gains as the Japanese yen soared up to 2.6% against the dollar before retreating, with traders unwinding carry trades.
Latin America’s high interest rates have made its currencies popular among Wall Street investors for carry trades, where investors borrow in a low-yielding currency like the yen to invest in higher-yielding currencies such as Colombia’s peso or Brazil’s real. The yen’s strength triggered speculation about possible intervention by Japanese authorities in the foreign-exchange market.
In Mexico, President-elect Claudia Sheinbaum appointed Lazaro Cardenas Batel as chief of staff. Meanwhile, minutes from the latest central bank meeting indicated members expect lower economic growth.
Developments in Emerging Europe
In Romania, inflation eased to its slowest pace since 2021, according to data released Thursday, enhancing the central bank’s scope for further monetary easing after its first rate cut in three years.
While Romania has maintained the stability of its closely managed leu, the Czech koruna and the Hungarian forint suffered losses earlier this week following their respective inflation readings. Serbia enacted its second interest-rate cut in two months on Thursday as inflation in the Balkan nation continues to decline.
Actions in Asia and Other Markets
In Asia, China implemented stringent measures to curb short selling and quantitative trading strategies in an effort to support its declining stock market. Additionally, the financial regulator instructed some rural lenders to shorten the average duration of their bond holdings, according to sources, as authorities aim to protect the banking sector.
Elsewhere, Malaysia’s central bank maintained its benchmark interest rate on Thursday, allowing time to assess the impact of potential price increases as the government rolls back blanket fuel subsidies. Economists predict that Peru’s central bank will hold rates steady at 5.75% on Thursday.
