Friday, February 3

Latam FX slides after US Fed hikes rates by half percentage point


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Latin American currencies

Underperformed emerging market peers on Wednesday after the US

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Federal Reserve’s projection for its target federal funds rate

came in higher than expected, while Brazil’s real slid on

shrinking economic activity.

The Fed raised interest rates by half a percentage point and

projected at least an additional 75 basis points of increases in

borrowing costs by the end of 2023 as well as a rise in

unemployment and a near stalling of economic growth in the

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The world’s largest economy.

“At the moment, the buck is slightly up since the Fed

will indeed continue to hike interest rates, and are expected to

go to over 5.0% by the time they are done. Moves going forward

will be very data-dependent and I expect Powell to lean on that

for an uncertain 2023,” said Juan Perez, director of trading at

Monex.

“BRL, MXN and LATAM all seem to be slightly weaker, but

we feel there will be other economic variables at play that will

improve currencies against the buck even with a hawkish, yet

predictable Fed.”

Risky assets of emerging markets have taken a hit but

Investors expect EM to hold up against developed markets next

year with an HSBC survey predicting a “distinct improvement” in

investor sentiment, led by Latin America.

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Brazil’s real slid 0.4% after data showed

economic activity contracted in October as aggressive

interest-rate hikes to battle inflation took a toll on growth.

Incoming Finance Minister Fernando Haddad has promised to

move up the timeline on new fiscal rules, seen as crucial to

sort out public finances, but has not committed to any dates.

Haddad also downplayed possible changes to the country’s

State-Owned Enterprise Law to make it easier for politicians to

take roles at state-run firms, saying effective auditing from

The federal government is more important.

President-elect Luiz Inacio Lula da Silva, meanwhile,

appointed Workers Party (PT) veteran Aloizio Mercadante to run

the development bank BNDES.

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“The appointment of Mercadante for BNDES raises concerns

that the subsided credit loans policy implemented in the past

could resume,” Citigroup strategists said in a note.

Political unrest continued to weigh on the Peruvian sol

.

Peru’s defense minister announced a

nationwide state of emergency

which will take effect in the next few hours and allow

soldiers to assist police in maintaining public safety after a

week of fiery protests and road blockades sparked by the ousting

of former President Pedro Castillo.

“The unrest is already causing economic damage, and the

fallout will be even larger if protests start to impact mining

activity,” said Kimberley Sperrfechter, EM economist at Capital

Economics. Peru’s is the world second largest producer of

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copper.

The Supreme Court is considering the prosecution’s request

for up to 18 months of preventative arrest for Castillo after he

was charged with rebellion and conspiracy.

Peru’s new government is looking at economic stimulus

Measures for regions roiled by protests, but will hold steady to

“non-negotiable” fiscal deficit targets, the economy minister

said.

If the government loosens purse strings, that could put

Peru’s public finances under strain, while sustained protests

could lead to shortages, which would force the central bank to

stay restrictive as inflation will likely pick up, she said.

Key Latin American stock indexes and currencies:

Stock indexes Latest Daily %

change

MSCI Emerging Markets 972.79 0.78

MSCI LatAm 2064.24 -1.14

Brazil Bovespa 103673.93 0.13

Mexico IPC 50218.51 -0.23

Chile IPSA 5207.76 -0.36

Argentina MerVal 163784.33 -1.037

ColombiaCOLCAP 1221.13 -0.7

Currencies Latest Daily %

change

Brazil real 5.3173 -0.15

Mexico peso 19.7050 -0.99

Chile peso 871.9 -1.78

Colombia peso 4778 -0.33

Peru sol 3.8149 -0.31

Argentina peso (interbank) 172.0500 -0.15

Argentina peso (parallel) 316 -0.32

(Reporting by Susan Mathew and Bansari Mayur Kamdar in

Bengaluru; Editing by Arun Koyyur and Nick Zieminski)

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