Emerging-Market Currencies Slip After US Retail Sales Beat

(Bloomberg) -- Developing-nation currencies trimmed weekly gains after data underscoring the resiliency of the US economy cooled bets on an outsize interest-rate cut by the Federal Reserve next month.

A benchmark gauge for emerging-market currencies closed 0.1% lower on Thursday, as traders parsed through a drop in jobless claims and stronger-than-forecast US retail sales. Latin American assets bucked losses, with the Mexican peso boosted by easing economic fears and Brazil stocks climbing.

The retail sales report “points to a resilient economy and fades some of the recession fears that hunted markets a few days ago,” said Alejandro Cuadrado, head of global FX and Latin America strategy at Banco Bilbao Vizcaya Argentaria SA in New York. “Investors are still playing one data point at a time, but the latest batch has been friendlier.”

The Czech koruna and the Hungarian forint were among the worst performers in a basket of peers. At the same time, MSCI Inc.’s EM stock index fell 0.1%, its first decline in five sessions.

“Markets have calmed down to some extent over recent days, although it is still too early to call the end of this turbulence, as financial market volatility remains at levels well above the averages of June-July,” analysts including Murat Ulgen wrote in a report by HSBC Bank Plc.

Traders have been growing confident that the Fed will be able to start cutting interest rates next month but there’s still some debate on the pace of monetary easing. The latest data helped cement bets that policymakers will be able to engineer a soft-landing of the economy, reducing the odds that it will start its cuts with a 50-basis-point move instead of a quarter-point one.

“The health of global economic activity is the most critical component for EM asset returns,” HSBC said. While the bank’s latest forecasts don’t project a global recession, economic activity has lost pace compared to the earlier part of the year. The bank remains “cautious and ultra selective on EM.”

Latin American assets extended gains on Thursday, with a key index for the region’s stocks up for an eighth session. Brazil’s benchmark Ibovespa index touched a fresh intraday high, while the peso strengthened as much as 0.9% against the US dollar.

“There’s an extent of US recession fears waning that’s supporting MXN, but also the typical funding currencies are selling off,” said Brendan McKenna, an emerging markets economist and FX strategist at Wells Fargo. “There’s a tentative re-engage of the carry trade that underway that is also helping.”

Elsewhere, a BBVA Research report showed that Turkey’s economic slowdown is happening faster than expected, with risks to 2024 growth forecasts leaning toward the downside.

In Africa, Kenya’s sale of infrastructure bonds attracted strong demand in a key test of investors’ appetite after a wave of anti-government protests led authorities to scrap a crucial tax-raising plan.