Strong US economic data hits rate cut expectations, emerging market currencies suffer
Data shows that the US economy is strong, leading to a decrease in market expectations for a rate cut by the Federal Reserve, and a narrowing of the currency gains in developing countries. This Thursday, the benchmark index for emerging market currencies fell by 0.1%, with analysts attributing it to the strong US retail sales impacting market sentiment. Despite relatively strong performance of Latin American assets, there is still debate in the market about whether the Federal Reserve will implement a significant rate cut, with the overall health of economic activity being key to the returns of emerging market assets
According to the financial news app Zhitong Finance, data shows that the U.S. economy is resilient, which has cooled market expectations for a significant rate cut by the Federal Reserve next month, leading to a narrowing of weekly gains in developing country currencies. On Thursday, the benchmark index for emerging market currencies closed down by 0.1%, as traders analyzed the impact of the decrease in U.S. initial jobless claims and better-than-expected U.S. retail sales. Latin American assets rose against the trend, with the Mexican peso boosted by easing economic concerns and the Brazilian stock market rising.
Alejandro Cuadrado, Global Foreign Exchange and Latin America Strategy Director at Bilbao Vizcaya Argentaria (BBVA), stated that the U.S. retail sales report "indicates economic resilience, dispelling recession concerns that troubled the market a few days ago." "Investors are still closely watching data points, but the latest batch of data is more favorable."
The Czech koruna and Hungarian forint performed the worst among a basket of currencies. Meanwhile, the MSCI Emerging Markets Index fell by 0.1%, marking the first decline in five trading days.
Analysts at HSBC, including Murat Ulgen, stated: "The market has been relatively calm in recent days, but it is still too early to declare an end to the turmoil, as financial market volatility remains much higher than the average level in June and July."
Traders are increasingly convinced that the Federal Reserve will begin cutting interest rates next month, but there is still some controversy over the pace of monetary easing. The latest data has helped solidify expectations that policymakers will be able to achieve a soft landing for the economy, reducing the likelihood of the Fed starting with a 50 basis point cut (rather than 25 basis points).
HSBC stated: "The health of global economic activity is the most critical factor for the returns of emerging market assets." While the bank's latest forecasts do not predict a global economic recession, economic activity has slowed compared to earlier this year. The bank remains "cautious and highly selective" towards emerging markets.
Latin American assets continued to rise on Thursday, with the region's main stock indices rising for the eighth consecutive trading day. Brazil's benchmark Ibovespa index hit an intraday high, while the peso-to-dollar exchange rate rose by 0.9%.
Brazilian stock market hits intraday high
Brendan McKenna, Emerging Markets Economist and Foreign Exchange Strategist at Wells Fargo, stated: "Concerns about a U.S. economic recession are diminishing, which has to some extent supported the Mexican peso, but typical funding currencies are also facing selling pressure. Arbitrage trading is tentatively becoming active again, which is also helping."
Elsewhere, a report from BBVA indicated that the Turkish economy is slowing down faster than expected, with downside risks to growth forecasts for 2024.
In Africa, infrastructure bonds issued by Kenya attracted strong demand, which is a key test of investor interest. Previously, a wave of anti-government protests led authorities to cancel a significant tax hike plan