(Bloomberg) — Latin American currencies fell on Thursday amid a decline in commodity prices and ongoing speculation that the Yen is set to strengthen, denting the allure of carry trades.
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The Chilean peso is the worst-performing currency among its emerging-market peers, followed by Brazil, Colombia and Mexico. The broader index for developing nation currencies edged 0.1% lower. Meanwhile, emerging-market equities dipped for a fifth session.
A surge in the yen Wednesday is still reverberating through the markets as the Japanese currency serves as a funding currency for carry trades. And while the currency is paring losses today, fears that it will resume its gains is pushing traders to unwind their bets, especially in Latin America, a favored destination for carry traders for the past two years.
“When it comes to willingness to intervene in FX markets, the Bank of Japan has flexed its muscles,” said Juan Perez, director of trading at Monex USA. “LatAm may actually be headed toward lower interest rates, which cuts off the appeal for those seeking higher yield simultaneously as borrowing from Japan may become less attractive.”
Currency Moves
Japan’s government is thought to have been the force behind the yen’s rally in recent days. Moreover, a prominent Japanese minister has called on the central bank to increase interest rates to boost the value of the currency.
Traders also kept their focus on commodities such as copper, whose prices slipped as traders struggled to see any signs of further stimulus from the Chinese government. Higher treasury yields and a stronger dollar during Thursday trading also weighed on emerging-market currencies.
Indonesia’s rupiah was another laggard among developing markets after the outgoing government tapped the President-elect’s nephew as a deputy finance minister. India’s rupee closed at a record low amid dollar demand from importers and defence-related payments, according to traders.
Elsewhere, South Africa’s rand bucked the trend of declines, gaining after the country’s monetary authorities held interest rates steady.
Stock Losses
In equity markets, the benchmark MSCI EM stock index lost 0.5% in its fifth session of declines, putting the gauge on pace for its longest streak of losses in almost a year as rising fears of a trade war between the US and China hit Asian tech companies.
Taiwan Semiconductor Manufacturing Co. fell after former US President Donald Trump questioned whether the US has a duty to defend Taiwan in a Bloomberg Businessweek interview. The US is also mulling stricter chip curbs on China, triggering a tech stock selloff as investors pondered the fallout for the world’s largest semiconductor arena.
“With much of the world’s most advanced chip manufacturing capabilities located within Taiwan, sixty-eight miles offshore China, that was not a message the market wanted to hear,” said Steve Clayton, head of equity funds at Hargreaves Lansdown. “Nor did it want to hear the Biden administration talking about tougher trade restrictions against China.”
In credit markets, a group of Ukraine’s bondholders has signed non-disclosure agreements to begin a second round of official talks with the government about restructuring more than $20 billion of debt, according to people familiar with the matter. Separately, lawmakers in Kyiv plan to adopt a law that allows the government to impose a temporary ban on foreign debt payments until October.
The government’s sovereign dollar bonds maturing in March 2035 fell for the fifth day.
–With assistance from Selcuk Gokoluk.
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