Emerging Currencies Plunge on Strong US Retail Sales Data

(Bloomberg) — Emerging-market currencies sank to the lowest in almost three months after US retail sales data came in much stronger than expected, overshadowing a reprieve in riskier assets from easing geopolitical tension in the Middle East.

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Latin American currencies were among the worst performing in the developing world as the US retail figures cemented bets the Federal Reserve won’t rush to cut interest rates as the economy remains resilient. Emerging-market stocks also fell for a third day.

“The US data points to high growth, which is still challenging for the Fed,” said Alvaro Vivanco, head of emerging markets at NatWest Markets.

Still, Federal Reserve Bank of New York President John Williams said the central bank will likely start lowering interest rates this year if inflation continues to gradually come down. US stocks advanced in early trading Monday, and the Vanguard FTSE Emerging Markets (VWO), the largest US-listed exchange-traded fund for developing world stocks gained 0.4% to 41.76 per share.

The Brazilian real led emerging-market currency losses, trading at the weakest since October, as President Luiz Inacio Lula da Silva’s administration looks to lower its primary fiscal surplus goal for next year amid reduced expectations for tax collections and a rougher environment for its agenda in Congress.

“This changes the expectations for Lula’s administration,” Vivanco said. “It’s a reaction to lower growth that isn’t priced in. It’s a negative surprise.”

Geopolitical Reprieve

The currency gauge had swung between gains and losses prior to the US data, as investors bet that Iran’s attack on Israel over the weekend won’t be immediately followed by a major escalation in the conflict.

The shekel advanced as much as 1.3% against the dollar after Iran said “the matter can be deemed concluded,” and some Western allies urged Israeli Prime Minister Benjamin Netanyahu to avoid further flare-ups.

“There seems to be some relief that the worst-case scenario of an all-out conflict has been averted for now,” said Wojciech Stepien, Warsaw-based analyst at BNP Paribas SA. “However, there seems to be lots of uncertainty about the further course of action of the Israeli government, which prevents a larger relief rally in the market.”

Read more: Oil Unruffled by Iran’s Assault on Israel as Brent Turns Lower

Mexico’s currency erased gains amid the risk aversion in currency markets. Though hedge funds continue to boost their bullish bets on the currency, according to the latest data from the Commodity Futures Trading Commission.

Ghana’s dollar bonds trimmed a decline after Finance Minister Amin Adam said that significant progress has been made on debt restructuring negotiations with bondholders, rejecting a report that talks have broken down. Still, the notes are the biggest losers for the session.

Elsewhere, Egypt’s pound weakened to the lowest in a month and the nation’s dollar bonds were among the worst performers across emerging markets.

–With assistance from Srinivasan Sivabalan and Giovanna Bellotti Azevedo.

(Recasts with market reaction throughout)

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