Emerging market currencies fluctuate as optimism fades after Fed meeting

(Bloomberg) — Emerging market currencies swung higher or lower as risk appetite waned after the Federal Reserve cut interest rates by half a percentage point.

MSCI’s developing-market currency index was little changed, having risen 0.16% earlier in the day. Brazil’s real led Latin America’s losses, posting its first decline in five sessions as traders awaited the government’s bimonthly budget review. A companion index of emerging-market stocks rose about 0.6%, led by gains in Taiwan and Hong Kong shares.

The Federal Reserve’s rate cut earlier this week inspired confidence that policymakers can achieve a soft landing for the U.S. economy. However, investors remain concerned about the global economy.

“Concerns about global growth are unlikely to dissipate entirely, while (geo)politics could further complicate the outlook for affected economies and assets,” Barclays strategists Andreas Kolbe and Sebastian Vargas wrote in a note on Friday.

Elsewhere in Latin America, the Mexican peso fell against the dollar, lagging other developing countries as traders bet that a sharp rate cut by the Federal Reserve would foreshadow further monetary easing by Mexico’s central bank governor at a Sept. 26 meeting, which could weaken the peso’s appeal.

In Asian FX markets, the Indonesian rupiah was among the biggest gainers, helped by rising bond inflows and supportive messages from rate setters, while the yuan – another EM FX standout on Friday – was boosted by the People’s Bank of China’s strengthening of its reference rate.

The Thai baht has gained about 10% against the dollar since late June, putting it on track for its biggest quarterly gain since the Asian financial crisis. The baht’s gains have prompted calls from the country’s tourism and hotel industry and business chambers to curb the gains.

Traders also kept a close eye on the Bank of Japan’s moves to keep borrowing costs on hold. The yen underperformed after Bank of Japan Governor Kazuo Ueda signaled policymakers were in no rush to raise interest rates, reducing the risk of an October hike.

In South Asia, Sri Lanka’s dollar bonds have underperformed those of other emerging market peers and its assets look set to suffer more losses as the country’s International Monetary Fund loan program is at risk after leading candidates pledged to renegotiate terms after the election.

At the same time, India has provided the Maldives with sufficient funds for its upcoming Islamic bond repayments, thus alleviating the island nation’s risk of default in the short term.

Egyptian officials plan to return to international debt markets for the first time since late 2021, selling $3 billion in foreign debt in tranches in the fiscal year ending in June, according to people familiar with the matter.

In the stock market, Philippine bank stocks rose after the central bank announced it would slash reserve requirements for large banks, injecting about 250 billion pesos ($4.5 billion) into the economy.

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