Emerging-market currencies took a hit, dropping to their lowest level in almost three months after strong US retail sales data indicated that the Federal Reserve may not be quick to cut interest rates. This news overshadowed the partial easing of geopolitical tensions in the Middle East, causing Latin American currencies to underperform in the developing world. Despite the expectation of interest rate cuts from the Federal Reserve Bank of New York President John Williams, the high growth indicated by US data poses a challenge for the central bank.
The Brazilian real experienced significant losses, trading at its weakest level since October, as President Luiz Inacio Lula da Silva’s administration considers lowering its fiscal surplus goal for next year. This decision comes amidst reduced expectations for tax collections and a more challenging environment in Congress. Alvaro Vivanco of NatWest Markets noted that this unexpected move has shifted expectations for Lula’s administration and highlights lower growth prospects that were not previously factored in, leading to a negative surprise in the market.
Meanwhile, despite some relief in markets due to the avoidance of immediate escalation in the conflict between Iran and Israel, uncertainty persists over the Israeli government’s future actions. Mexico’s peso remained relatively stable amid renewed risk aversion, with hedge funds continuing to increase their bullish bets on the currency. Ghana’s dollar bonds, on the other hand, faced challenges as they were among the worst performers in emerging markets, despite progress being made on debt restructuring negotiations according to Finance Minister Amin Adam.
