Janice R. Andrews
Following better-than-expected US retail sales figures that suggested the US economy is still robust, emerging-market currencies fell. The US economy’s tenacity subdued expectations of a big interest rate decrease by the Federal Reserve in the next month. A significant emerging-market (EM) currency benchmark fell by 0.2% in New York on Thursday afternoon, decelerating the previous week’s advances. This dip occurred after traders evaluated a number of variables, such as the US unemployment claims declining and retail sales exceeding expectations.
However, Latin American assets stood out favorably despite the general slide in emerging-market currencies, with the Mexican peso gaining traction as a result of alleviating economic concerns. The strengthening of investor confidence and waning worries of an imminent US recession coincided with the peso’s rise. Rejecting fears of a recession that had lately unsettled markets, Alejandro Cuadrado, director of global FX and Latin America strategy at Banco Bilbao Vizcaya Argentaria (BBVA) in New York, said the retail sales figure showed a robust economy. Although investors are closely assessing every new piece of information, he pointed out that the most recent reports have been more positive.
The Czech Koruna and Chinese Renminbi Perform Badly
A basket of emerging-market peers showed that the Chinese yuan and the Czech koruna were among the worst, despite certain Latin American currencies outperforming. The EM stock index tracked by MSCI Inc. had a 0.2% decrease as well, its first after five straight sessions of gains.
Murat Ulgen and other experts at HSBC Bank said that while there has been some market quiet in recent days, it is still too soon to call an end to the current volatility. Financial market volatility is still significantly higher than the norm for June and July, even in the face of some stability. Because of the unstable state of the world economy, traders are being cautious as they wait for more reliable signs of a rebound.
Effect on Rate Cuts by the Federal Reserve
Traders had been expecting as early as next month that the Federal Reserve will start lowering interest rates. On the other hand, there is still a great deal of disagreement over how big the planned cuts will be. The expectation that the Fed will choose a more mild approach to easing, perhaps starting with a 25-basis-point drop rather than the 50-basis-point decrease some had anticipated, was reinforced by the improved US economic statistics, especially the high retail sales figures. Analysts now think that rather than pursuing an ambitious monetary easing program, the Fed could be planning a “soft landing” for the economy.
Global economic activity, according to HSBC, is a major factor in determining how well emerging-market assets perform. The bank admitted that economic growth has slowed from the early months of the year, but not predicting a worldwide recession. Given the state of the market, HSBC continues to be selective and cautious when making investments in emerging markets currencies.
Strength in Latin American Currencies
Latin American assets continued to rise as several emerging-market currencies declined. For the seventh straight session, a significant stock index for the area showed gains. The Ibovespa index of Brazil reached a new intraday high, and the peso gained up to 0.9% vs the US dollar in Mexico. Wells Fargo’s Brendan McKenna, an economist specializing in developing markets, proposed that the peso’s strength was due to the selling of traditional financing currencies as well as the diminished concerns about a US recession. He said that another element bolstering the peso’s strength was the carry trade’s comeback.
Prospects for Developing Markets
Emerging markets continue to have an unclear future. According to a BBVA Research analysis, Turkey’s economic recession is progressing more quickly than expected, and growth projections for 2024 are at danger of being negatively impacted. Strong investor demand was seen in Kenya’s infrastructure bond auction, which was an important gauge of market confidence following the government’s reversal of a crucial tax-raising plan due to a series of anti-government riots.
The global economic environment is always changing, and this has an impact on emerging-market currencies. Investors follow important data releases from large economies, such as the US, to predict future monetary policy and economic trends.
