Emerging market currencies experienced a second consecutive week of decline, culminating in Friday’s losses led by the Brazilian real, as investors anxiously await the Federal Reserve’s final meeting of the year. This anticipation comes amidst a backdrop of global economic uncertainty and specific challenges in various emerging markets.
The index tracking developing-nation currencies fell on Friday, marking a 0.2% weekly loss. The real underperformed for the second consecutive session despite the Brazilian central bank’s intervention through a dollar auction and a dollar credit line sale. The Chilean peso and several Asian currencies also depreciated, influenced by underwhelming stimulus measures announced by China.
Market participants are now focused on the Federal Reserve’s upcoming interest rate decision and the latest US economic data releases. Analysts at Nataxis anticipate a cautious and gradual approach to rate cuts in the coming months, citing not only growth and inflation concerns but also uncertainty surrounding President-elect Donald Trump’s policies.
According to Daniel Velandia, chief economist at Credicorp Capital Colombia, Latin American currencies are expected to react more to Fed Chair Jerome Powell’s commentary than the actual rate decision next week, as a 25 basis-point cut is largely priced in. “If Powell reassures markets that the rate cut process will continue, we could see a better performance from currencies that have been significantly impacted,” he stated.
Brazilian markets have been particularly volatile due to President Luiz Inacio Lula da Silva’s emergency brain surgery and the central bank’s hawkish rate hike, which failed to alleviate concerns about the country’s fiscal health. “The Brazilian real faced considerable pressure due to uncertainty around fiscal slippage and the risk of fiscal dominance,” noted Thierry Larose, a portfolio manager at Vontobel Asset Management in Zurich. “Despite these challenges, the currency remained relatively stable.”
Disappointment stemming from China’s Central Economic Work Conference, which concluded without concrete details on fiscal stimulus, further dampened emerging market sentiment. While authorities pledged to boost consumption, the lack of specifics left investors wanting. China’s economic performance significantly influences commodity prices and global growth. Chinese 10-year yields reached new lows as the government signaled further easing, while Chinese equities traded lower.
Elsewhere, the Indonesian rupiah weakened as Bank Indonesia indicated intervention to support the currency. The South Korean won also declined as traders await the outcome of another impeachment vote against President Yoon Suk Yeol.
In credit markets, Sri Lanka secured substantial support from private creditors to restructure its international bonds, a crucial step towards resolving its extended default. This development offers a glimmer of hope for the country’s economic recovery.
The coming weeks will be crucial for emerging markets as they navigate the complexities of global economic uncertainty and domestic challenges. The Federal Reserve’s decisions and commentary, along with developments in key economies like China and Brazil, will continue to shape the trajectory of these markets.
