Latin American currencies rallied on Friday, with the Brazilian real looking to recoup this week’s losses after data showing a moderation in U.S. wage growth hurt the dollar.
The real jumped 2.1% to 5.23 per dollar – its strongest level since Dec. 29, while the Colombian peso, Chilean peso and Mexican peso rose in the range of 1.1% to 2.2%. The dollar wilted against its major peers after data showed the U.S. economy added jobs at a solid clip in December but investors took solace from a moderation in wage gains that could put the Federal Reserve on course for smaller rate hikes.
Traders priced in a stronger chance that the U.S. central bank would raise rates just a quarter of a percent at its next two-day meeting in February. “Job gains were still robust enough to dispel recession concerns, while wage pressures had cooled considerably from last month’s data scare to avoid stoking expectations that the Fed will have to continue acting forcefully,” Simon Harvey, head of FX analysis at Monex Europe, told clients.
“Given Powell’s implied preference to downshift the pace of the hiking cycle again at the next meeting, we think 25bps is the likeliest option next month barring a substantial uptick in core services inflation.”
The real, among the top performing EM currencies in 2022, came under pressure earlier this week on concerns about Brazil’s fiscal health under President Luiz Inacio Lula da Silva’s leadership. Lula said on Friday it was possible for the country to grow with responsibility, in an attempt to calm investors after communication hiccups in the early days of the leftist administration roiled domestic markets.
“The ‘pragmatic Lula’ that many had hoped for when he first won the election has yet to make an appearance,” said William Jackson, chief emerging markets economist at Capital Economics. “The good news is that some of Lula’s appointees have tried to calm investors’ nerves (and this has helped Brazilian assets claw back lost ground).”
The main Bovespa stock index jumped 0.9%, but not enough to reverse weekly declines. Miner Vale jumped 1.7% as iron ore prices rose on optimism around China’s stepped-up policy support for the ailing property sector. Overall, Latin American equities were set to end the week with gains of 2.5% as hopes of a rebound in China’s economy lifted most commodity prices. Elsewhere, South African rand slipped 0.3% to 17.17 per dollar after weakening to as low as 17.11 after a Bloomberg report said the governing party wants the central bank’s mandate broadened to shore up the economy and promote employment in addition to its existing task of targeting inflation.
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