Latin American Currencies Head to a Second Day of Losses

(Bloomberg) — Latin American currencies are heading to a second day of losses as the US dollar advanced and commodity prices weighed on some of the main markets.

The Colombian peso underperfomed peers on Friday as oil slipped, while the Brazilian real and the Chilean peso also posted losses due to falling commodity prices and domestic political uncertainty. The only exception is the Mexican peso, which nearly erased yesterday’s losses but remains on track for a second straight weekly loss.

Overall, Latin American currencies have been among the worst performing globally during a month when those from other regions largely appreciated against the US dollar, BBVA strategists wrote in a report on Friday.

The Brazilian real has been the most volatile, jumping briefly at the open after the central bank announced a currency intervention of $1.5 billion and then weakening as much as 1.1% following the publication of budget data that came in far worse than expected. It trimmed losses following the announcement of more interventions.

The broader MSCI emerging-market currency index is mostly flat, with traders anticipating thinner liquidity on Monday due to a US holiday. The currency index is headed for the biggest monthly gain since November.

“The dollar rebound from yesterday continues, with US yields marginally up,” said Alejandro Cuadrado, head of global FX at BBVA in New York. “Today I would expect that the long weekend weighs, liquidity to decrease and defensive positions are taken given that markets will be closed in the US on Monday.”

Meanwhile, a fresh print of Fed’s preferred measure of underlying inflation reinforced the case for rate cuts. Traders will now be turning to jobs data next week for more clues on the pace of monetary easing. 

Emerging stocks were having a more upbeat day, breaking a three-day losing streak. The MSCI stock gauge was up by 0.4%, led by Asian pharmaceutical companies and semi-condutor manufacturers. 

On the credit side, emerging-market sovereign dollar bonds are heading for their biggest monthly gains of the year, driven by expectations that US interest-rate cuts will boost inflows into riskier assets. A gauge of developing dollar bonds gained 2.6% so far in August, the most since last December, according to data compiled by Bloomberg. The index has risen for the past four months. 

“There is still a strong case for EM credit,” Trang Nguyen, global head of emerging-market credit strategy at BNP Paribas, said on Bloomberg TV on Friday. “With Fed cuts, that means that inflows will probably come back.” 

Emerging-markets are seeing more cash from investors. Hard-currency bond funds saw small inflows this week after six weeks of outflows, according a Barclays Plc research note on Friday. In equities, funds registered the largest inflow in five weeks, Bank of America said, citing EPFR Global data.

In Friday’s trading, bonds from China, Colombia and Egypt were among the top performers. 

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