(Bloomberg) -- Emerging-market currencies posted a second-straight week of losses, led lower on Friday by the Brazilian real, as traders prepare for the Federal Reserve’s last meeting of the year.
An index of developing-world currencies slid Friday to cap off a 0.2% loss for the week. The real lagged peers for a second session, even after the central bank announced a dollar auction in a move to halt the selloff and a dollar credit line sale after close. The Chilean peso and Asian currencies also tumbled as China’s stimulus plans underwhelmed investors.
Traders are now turning their attention to the Federal Reserve’s final rate decision of the year, taking in the latest slew of economic data from the US. Analysts at Nataxis expect a more gradual and cautious pace of cuts in the coming months, not just in response to growth and inflation, but to uncertainty around President-elect Donald Trump’s policies, according to a note published on Friday.
Next week, Latin American currencies are expected to react more to comments from Fed’s Chair Jerome Powell than to the rate decision itself, as a 25 basis-point cut is mostly priced in, said Daniel Velandia, chief economist at Credicorp Capital Colombia.
“If Powell were to reassure markets in his speech that the rate cut process will continue, we could definitely see a better relative performance of currencies that have been severely punished,” he said
Brazilian markets have been rattled as President Luiz Inacio Lula da Silva underwent emergency brain surgery and the central bank’s hawkish rate hike failed to appease traders who are concerned over the country’s fiscal issues.
“The Brazilian real faced particularly adverse conditions due to heightened uncertainty around fiscal slippage and the looming risk of fiscal dominance,” said Thierry Larose, a portfolio manager at Vontobel Asset Management in Zurich. “Despite these challenges, the currency held its ground.”
China Disappointment
China 10-year yields fell to a fresh low as the government signaled more easing, and Chinese equities were in the red on Friday, driving benchmark EM equities index to a 0.5% loss at close. It still eked out a gain for the week.
Emerging-market sentiment was subdued after China’s Central Economic Work Conference ended without policy details on fiscal stimulus, even as authorities pledged to boost consumption. China is the world’s second largest economy and its growth often determines commodity prices.
Elsewhere, the rupiah also weakened against the greenback as Bank Indonesia signaled that it was intervening to support the local currency. The won edged lower against the dollar for a second day as traders await the results of another impeachment vote against President Yoon Suk Yeol expected Saturday.
In credit markets, Sri Lanka gained extensive support from private creditors to restructure its international bonds, a key step for the country to exit an extended default.
--With assistance from Kerim Karakaya.
