EMERGING MARKETS-Mexican peso surges after surprise central bank rate hike

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* The bank c. Mexico hikes overnight rates by 25 basis points * Brazil’s cenbank raises its GDP growth forecast for 2021 to 4.6% The peso surged on Thursday, leading to gains among its Latin American counterparts, after The country’s central bank unexpectedly raised its benchmark interest rate, while a stable dollar on average US labor data also supported currencies. The peso rose 1.7% to a two-week high as Mexico’s central bank, commonly known as Banxico, raised its policy rate by 25 basis points to 4.25% to protect itself from negative effects on expectations inflation. The move follows a hawkish trend by the U.S. Federal Reserve last week, which signaled that higher rates could come sooner than expected. “Banxico’s surprise 25bp rate hike suggests that its reaction function is not as accommodating as we thought, with most board members increasingly concerned about the outlook for inflation,” said Nikhil Sanghani, Latin American economist at Capital Economics. “With the policy rate set to stay above target for the next few months, this hawkish change in trend suggests further tightening is likely over the remainder of the year.” Data on Thursday showed consumer prices during the first half of June rose more than expected, while a separate reading showed Mexico’s unemployment rate declined in May. Rating agency S&P raised its forecast for Mexican economic growth to 5.8% for this year and 2.9% in 2022, saying Mexico is benefiting from a strong economic recovery in the United States, via exports manufacturing and remittances. While the peso had benefited from relatively higher rates at the start of the year, hikes by its Brazilian regional counterpart, as well as a drop in Mexican lending rates in February, lessened the peso’s appeal for the carry trade. The Brazilian real rose 1.2% as the country’s central bank raised its outlook for economic growth for this year to 4.6% from 3.6%, closer to the broader market consensus. Sentiment towards emerging markets improved after weekly jobless claims in the US fell much less than expected, while new orders for US-made capital goods fell unexpectedly in May . The data allayed some fears of an imminent Fed policy tightening, as the job market is a major factor for the bank to consider halting its massive stimulus program. Latam stocks also rose, with the MSCI regional equity index rising 1.7%, topping the broader emerging markets index. The focus was also on the Argentinian markets, with index provider MSCI expected to provide an update after the US market closes on whether Argentina can continue to be part of its emerging markets benchmark. If not, the country’s assets will be relegated to frontier markets or to autonomous status. Ejection of the MSCI emerging markets index could also lead to outflows of $ 610 million from Argentine stocks, JPMorgan calculated. Main Latin American stock market indices and currencies at 1933 GMT: Stock market indices Last daily change in% MSCI Emerging markets 1368.33 0.58 MSCI LatAm 2693.76 1.7 Brazil Bovespa 129205.35 0.61 Mexico CPI 50499.86 0, 66 Chile IPSA 4,415.86 1.04 Argentina MerVal 67,058.44 1.465 Colombia COLCAP 1280.62% 2.7 Foreign exchange Brazilian real 4.9047 1.19 Mexican peso 19.8890 1.39 Chilean peso 734.3 0.10 Colombian peso 3,763.25 0.47 Peruvian sol 3.9838 -0.13 Argentine peso (interbank) 95.5500 -0.01 Argentine peso (parallel) 167 -0.60 (Report by Ambar Warrick and Shreyashi Sanyal; edited by Dan Grebler and Nick Zieminski)


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