(Bloomberg) — Emerging-market currencies sank to the lowest in almost three months after US retail sales data came in much stronger than expected, overshadowing a reprieve in riskier assets from easing geopolitical tension in the Middle East.
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Latin American currencies were among the worst performing in the developing world as the figures from the world’s largest economy cemented bets the Federal Reserve won’t rush to cut interest rates. The declines come even as Federal Reserve Bank of New York President John Williams said the central bank will likely start lowering interest rates this year if inflation continues to gradually come down.
“The US data points to high growth, which is still challenging for the Fed,” said Alvaro Vivanco, head of emerging markets at NatWest Markets.
The Vanguard FTSE Emerging Markets (VWO), the largest US-listed exchange-traded fund for developing world stocks, erased gains to trade flat for the session. An index for Latin American stocks slid to the lowest level this year, while a broad gauge of emerging-market shares slid a third day.
The Brazilian real led emerging-market currency losses, trading at the weakest since October, as President Luiz Inacio Lula da Silva’s administration looks to lower its primary fiscal surplus goal for next year amid reduced expectations for tax collections and a rougher environment for its agenda in Congress.
Read more: Brazil Will Water Down Key 2025 Budget Target as Spending Rises
“This changes the expectations for Lula’s administration,” Vivanco said. “It’s a reaction to lower growth that isn’t priced in. It’s a negative surprise.”
Geopolitical Reprieve
MSCI’s EM currency gauge had swung between gains and losses prior to the US data, as investors bet that Iran’s attack on Israel over the weekend won’t be immediately followed by a major escalation in the conflict.
The shekel advanced as much as 1.3% against the dollar after Iran said “the matter can be deemed concluded,” and some Western allies urged Israeli Prime Minister Benjamin Netanyahu to avoid further flare-ups.
“There seems to be some relief that the worst-case scenario of an all-out conflict has been averted for now,” said Wojciech Stepien, Warsaw-based analyst at BNP Paribas SA. “However, there seems to be lots of uncertainty about the further course of action of the Israeli government, which prevents a larger relief rally in the market.”
Read more: Oil Unruffled by Iran’s Assault on Israel as Brent Turns Lower
Mexico’s peso was little changed amid the renewed risk aversion in markets, though hedge funds continue to boost their bullish bets on the currency, according to the latest data from the Commodity Futures Trading Commission.
Ghana’s dollar bonds were the worst performers in emerging markets even as they trimmed a decline after Finance Minister Amin Adam said that significant progress has been made on debt restructuring negotiations with bondholders, rejecting a report that talks have broken down.
–With assistance from Srinivasan Sivabalan and Giovanna Bellotti Azevedo.
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