Currencies stretch declines as strong U.S. manufacturing spurs dollar

Emerging market currencies deepened

losses on Thursday as better-than-than expected U.S.

manufacturing data bolstered the dollar, which is already

benefiting from bets of more aggressive monetary policy

tightening by the Federal Reserve this month.

After logging their third straight month in the red on

Wednesday, MSCI’s index of EM currencies slipped

0.5% on Thursday, hitting its lowest in nearly two years.

Despite the Fed’s tightening, U.S. manufacturing grew

steadily in August as employment and new orders rebounded, data

showed. As traders bet that the Fed will deliver its third 75

basis points hike of the year in September, the dollar has

stayed buoyant.

“An environment of tighter global liquidity for longer will

be a testing one for emerging market assets,” said Alejo

Czerwonko, chief investment officer EM Americas at UBS Global

Wealth Management.

“Most countries are up for the challenge, though …

Colombia, Chile, South Africa, and to a lesser extent the

Philippines and Thailand exhibit some vulnerabilities.”

Brazil’s real, which rose earlier in the

session after data showed economic growth rose more than

expected in the second quarter, reversed gains to fall nearly

1%as the dollar gained momentum.

The pace of growth in Brazil will be difficult to sustain in

the coming quarter as higher domestic interest rates will weigh

on output, said Jared Lou, portfolio manager, EM debt at William

Blair Investment Management.

“Additionally, debt-to-GDP ratios near 78% and inflation

over 10% in July limit policy flexibility.”

Chile’s peso was flat after falling 1% earlier in the

session as the price of copper – the country’s biggest export

revenue item – slipped amid worries about China demand.

Data on Thursday showed the rate of growth in Chile’s

economic activity slowed in July from June. Still Chile’s

central bank is seen hiking by 75 basis points this month to

rein in inflation.

Investors also looked ahead at Chileans voting on a new

constitution over the weekend, with support dwindling in recent

weeks for the new document and polls showing voters are more

likely to reject the new text.

“Even if the constitution is rejected, it is clear that

Chile is moving towards a larger role for the state in the

economy. That’s likely to entail larger budget deficits and a

rising public debt ratio,” said Kimberley Sperrfechter,

assistant emerging markets economist at Capital Economics.

In Mexico, the peso fell 0.2%. A central bank poll

showed private sector analysts see the peso ending the year at

20.70, stronger than an earlier forecast of 20.82, but weaker

than the 20.22 it is currently trading at.

Mexico’s central bank on Wednesday said it is not wed to

hiking interest rates in line with the Fed. The Mexican monetary

authority had raised its key interest rate by 75 basis points in

August.

Key Latin American stock indexes and currencies at 1853 GMT:

Stock indexes Latest Daily %

change

MSCI Emerging Markets 974.74 -1.95

MSCI LatAm 2118.87 -0.35

Brazil Bovespa 110023.13 0.46

Mexico IPC 45471.09 1.23

Chile IPSA 5409.30 -0.58

Argentina MerVal 137191.30 0.698

Colombia COLCAP 1224.21 -0.34

Currencies Latest Daily %

change

Brazil real 5.2296 -0.57

Mexico peso 20.1840 -0.24

Chile peso 895.9 0.07

Colombia peso 4480.95 -1.29

Peru sol 3.8625 -0.30

Argentina peso (interbank) 139.0200 -0.21

Argentina peso (parallel) 281 3.20

(Reporting by Susan Mathew and Shreyashi Sanyal in Bengaluru;

editing by Jonathan Oatis)