(Bloomberg) -- Emerging-market currencies briefly soared before coming down from a session high on Wednesday as Federal Reserve Chair Jerome Powell signaled policymakers are not in a rush to ease after they delivered a half-point cut.
MSCI’s index for developing currencies closed 0.05% higher after rising as much as 0.26% earlier in the day. The move followed Powell’s remarks that cautioned against assuming the half-point move set a pace that policymakers would continue. Meanwhile, an index for EM stocks closed 0.25% lower, dragged down by shares in Taiwan.
“Financial conditions easing with risk-on is usually positive for EMFX, so in the immediate aftermath this should bode well for the EMFX complex,” said Jayati Bharadwaj, a strategist at TD Securities.
Projections released following the Fed’s meeting showed a narrow majority, 10 of 19 officials, favored lowering rates by at least an additional half-point over their two remaining meetings for 2024. Policymakers penciled in an additional percentage point of cuts in 2025, according to their median forecast.
“We are less bullish on EMFX for remainder of the year on political, geopolitical and macro uncertainty rising,” Bharadwaj added, referring to a potential Trump presidency, risks of tariffs, trade wars and weak global growth.
Still, some investors believe the Fed’s decision stands to boost currencies across Latin America. Brazil’s real was among one of the biggest gainers against the greenback in emerging markets.
“This decision is the best scenario” for the region, said Andres Pardo, head of LatAm macro strategy at XP Investments. “The message is dovish with more emphasis on the labor market, but in a scenario that points to a soft landing. This should be positive for the BRL, COP and CLP.”
For all the optimism though, Mexico’s peso — which is sensitive to US economic risks — may be at a disadvantage compared to its Latin American peers. The peso slid against the dollar and was one of the biggest laggards among its developing-nation peers. Earlier on Wednesday, the currency touched a session low.
“A 50bps cut by the Fed could signal concerns about the US economy and therefore Mexico’s GDP,” said Benito Berber, chief Latin America economist at Natixis. “In addition, the increase in the political risk premium will not disappear in the next few years.”
EM traders are also keeping tabs on other central bank decisions across the developing world. Overnight, the Bank of Indonesia unexpectedly cut its key interest rate for the first time in more than three years.
Brazil’s central bank is expected to hike the benchmark rate by 25 basis points to 10.75% in a decision due after markets close. Monetary Policy Director Gabriel Galipolo, tapped to become the bank’s next governor, has pledged to do “whatever it takes” to slow inflation to target.
In credit markets, Romania moved ahead with a plan to sell its first-ever bonds on the Japanese market as the Balkan nation seeks to diversify funding and raise more debt to cover a widening budget deficit.
--With assistance from Zijia Song, Giovanna Bellotti Azevedo and Peter Laca.
©2024 Bloomberg L.P.
