The odds that just one final Federal Reserve interest-rate hike lies ahead is fueling a rally across emerging-market currencies.
(Bloomberg) — The odds that just one final Federal Reserve interest-rate hike lies ahead is fueling a rally across emerging-market currencies.
Brazil’s real soared to the highest since June and the Colombian peso touched a seven-month peak on Wednesday after a key gauge of US inflation showed hints of moderating in March. Mexico’s peso also jumped to an intraday high as traders embraced bets that the Fed will soon end its tightening cycle, sending the US dollar lower.
“A less-tight monetary policy in the US is good for EMs,” said Thierry Wizman, director of global currencies and interest-rate strategist at Macquarie Futures USA LLC in New York.
Investors eager to bet on emerging-market assets this year have been waiting for signs that the world’s most-influential policymakers are reaching the end of their aggressive tightening cycle.
Read: NWI Hedge Fund Drops Bet on Super Peso as Nearshoring Priced In
While core inflation in the US only slowed a bit, key measures of housing costs posted the smallest monthly increases in about a year and grocery prices dropped. That solidified bets the Fed will still have to raise rates one more — and also that cuts could come later this year.
“The data shows the disinflationary process continues, even if it’s at a slow pace, which reduces the potential need of the Fed to be aggressive,” said Juan Prada, foreign-exchange strategist at Barclays Capital Inc. in New York. “An environment where US rates are relatively contained — with inflation moderating and the shadow of the banking crisis — favors carry.”
A Bloomberg gauge of so-called carry trades — which borrows dollars and puts the funds into a basket of emerging currencies — has already been gaining, up roughly 4.3% so far this year.
Read: Popular Emerging Market FX Trade Back With Global Rates Peaking
Citigroup strategists Dirk Willer and David Glass added a 1% Chilean peso overweight to their emerging-market bond portfolio after the US data, citing a weaker dollar and boosts from the China reopening trade.
“Increased optimism from the Chinese recovery should benefit the EMFX high yielders that are more tied to China versus the US,” they wrote.
(Updates prices throughout, adds Citi comments in final two paragraphs.)
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