Latam FX slumps as U.S-China tensions sour mood

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Latin American currencies joined broader

emerging market peers in heading lower on Tuesday, with Brazil’s

real sliding more than 1%, as rising U.S.-China tensions drove

investors towards safe-haven assets.

Mexico’s peso slipped 1.5%, while Chile’s peso

fell 1.8% and Brazil’s real moved further away from

six-week highs hit last session. A sharper than expected drop in

Brazil’s industrial output added to pessimism.

“Brazil’s central bank will likely hike its policy rate by

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50 basis points on Wednesday (to 13.75%) and leave the door open

for one final increase in the cycle,” said Jonas Goltermann,

senior markets economist at Capital Economics.

“Those hikes are likely even though the economy is showing

further signs of slowing – the surprisingly large 0.4%

month-on-month fall in industrial production in June provided

the latest evidence of this.”

Colombia’s peso dropped 1.1%, snapping a five-session

winning streak. Colombia’s central bank on Monday raised its

inflation outlook for 2022 to 9.7% from 7.1%, as high consumer

prices and global supply pressures persist.

Global sentiment took a hit on Tuesday as U.S. House of

Representatives Speaker Nancy Pelosi arrived in Taiwan, starting

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a visit that Beijing had warned her against taking, saying it

would undermine Sino-U.S. relations. China claims Taiwan as its

own and said a U.S. visit would challenge its sovereignty.

Citigroup strategists see bonds benefiting from the

geopolitical uncertainty.

“While uncertainty on whether inflation will fall back by

enough remains high, fixed income may be better supported for

now. Latam rates should benefit from that. The Taiwan situation

may also support rates in the short term, though a major

escalation is more of a fat tail, rather than our base case.”

The events intensify tensions between the United States and

China, already at loggerheads following a tariff war that began

in 2018. China is a major commodities export destination for

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resource-rich Latam.

In Argentina, the new economy superminister Sergio Massa

appointed his top advisers on Monday, vowing to stop high

inflation and economic deterioration.

Massa appointed Eduardo Setti, an economist with experience

in capital markets, as finance secretary, and seasoned Daniel

Marx to the public debt monitoring team. Raul Rigo will be

treasury secretary.

In Ecuador, some bond holders received interest payments

which had been due on the bonds on July 31, sources said.

Meanwhile, subsidies from the Mexican government to combat

inflation have cost some 575 billion pesos ($28.04 billion) this

year, officials said.

Outages disrupting Venezuela’s power and gas supplies to

state-run energy firm PDVSA hit July oil exports, contributing

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to a 27% fall from the previous month, according to Refinitiv

Eikon vessel tracking data and the company’s internal documents.

Key Latin American stock indexes and currencies at 1920 GMT:

Stock indexes Latest Daily % change

MSCI Emerging Markets 982.99 -1.21

MSCI LatAm 2083.50 -1.9

Brazil Bovespa 103368.84 1.12

Mexico IPC 46896.66 -1.03

Chile IPSA 5225.62 -0.62

Argentina MerVal 119172.36 1.348

Colombia COLCAP 1280.77 0.68

Currencies Latest Daily % change

Brazil real 5.2712 -1.79

Mexico peso 20.7460 -1.82

Chile peso 906.4 -1.77

Colombia peso 4314.6 -1.08

Peru sol 3.9132 -1.08

Argentina peso 132.1900 -0.22

(interbank)

Argentina peso 286 -1.40

(parallel)

(Reporting by Susan Mathew and Anisha Sircar in Bengaluru;

editing by Barbara Lewis and Marguerita Choy)