Latin American Currencies Gain Momentum Amid Commodity Price Surge and Tariffs

Emerging market currencies, particularly those in Latin America, experienced significant gains on Monday, shrugging off tariff tensions amidst rising commodity prices.

MSCI Emerging Market Currency Index

The MSCI Emerging Market Currency Index regained its momentum, trimming early losses to 0.1% during early morning trading in New York. The Brazilian real and Chilean peso emerged as frontrunners, with the latter approaching its highest closing level since November.

Underlying Factors

* Strong inflation and robust copper exports supported the Chilean peso.
* Mexico's peso lagged behind, declining 0.3%.
* Commodity prices, including oil and iron ore, exhibited a positive trend, bolstering Latin American currencies.
* Lower US yields and eased pressure on the US dollar further contributed to the favorable environment.

Impact of Trump's Tariffs

Despite Donald Trump's announcement of 25% tariffs on all US imports of steel and aluminum, Latin American currencies remained resilient. Brad Bechtel, head of global FX strategy at Jefferies, attributed this resilience to the positive commodity market sentiment and the expectation of a temporary consolidation point.

Domestic Factors

According to Bechtel, domestic factors in Latin America currently play a lesser role, but their potential to reemerge remains.

Asian Currencies

Across the developing world, China's onshore-traded yuan weakened to a three-week low, dragging down Asian currencies. The Malaysian ringgit and Indian rupee both declined.

Outlook

The tariff plans and strong US jobs growth data may lead the Federal Reserve to maintain interest rates, supporting the dollar and Treasury yields. Reciprical tariffs and upcoming US inflation and retail sales data are expected to keep the Fed on hold, potentially weighing on emerging market currencies.

Emerging Market Equities

A gauge tracking emerging-market equities recovered earlier losses, driven by rallies in Latin American stocks. Brazilian stocks surged due to rising commodity prices and earnings-driven gains in banking stocks.

Fixed Income

In the fixed income space, Lebanon's defaulted sovereign dollar notes performed well following the appointment of Amer Bisat as economy minister. Ecuador's dollar bonds, however, suffered the steepest decline in two years after a strong showing by socialist challenger Luisa González in the presidential election.