Emerging market currencies surged to their highest level since May after a surprising decline in the U.S. consumer price index in June, bolstering expectations for the Federal Reserve to cut interest rates soon. The South African rand and the South Korean won experienced gains, pushing the emerging market currency index up by 0.2% alongside a weaker U.S. dollar. Additionally, the broad stock index closed at a two-year high, supported by gains from the two largest U.S. exchange-traded funds tracking it during the trading session.
U.S. consumer prices fell by 0.1% in June, while the core inflation index—excluding food and energy—increased at its slowest monthly pace since August 2021. These figures enhanced the likelihood of three interest rate cuts by the U.S. this year, according to swap market estimates. Marco Oviedo, an analyst at XP Investimentos in São Paulo, commented, “This is a very good rate for emerging markets, and it gives the Federal Reserve a justification to cut rates sooner than expected.”
This scenario highlights the importance of easing monetary policies in other countries, especially after inflation rates in Hungary, the Czech Republic, and Romania this week underscored the rationale for rate cuts.
**Decline in "Carry Trade"**
Latin American currencies, which were expected to benefit from an increased appetite for risk, performed poorly, giving up gains as the Japanese yen rose 2.6% against the dollar before falling back again, as traders moved away from what is known as "carry trade." High-interest rates have led Wall Street to favor carry trade in these markets, where investors borrow in a low-yielding currency, such as the yen, to purchase a higher-yielding currency, like the Colombian peso or Brazilian real. Increased strength of the yen sparked speculation about potential intervention by authorities in the foreign exchange market.
In Mexico, elected president Claudia Sheinbaum appointed Lazaro Cardenas Batel as her chief of staff, while the minutes from the last central bank meeting indicated that monetary policy committee members expect a decline in economic growth.
**Emerging Countries in Europe**
Data released on Thursday showed inflation in Romania falling to its slowest pace since 2021, reinforcing the likelihood of continued monetary policy easing by the central bank after it implemented its first interest rate cut in three years. Despite Romania's success in maintaining stability for its tightly managed leu, the Czech koruna and Hungarian forint faced setbacks earlier this week following inflation readings for both countries. Serbia made its second interest rate cut in a few months on Thursday as inflation continued to decline in the Balkan state.
In Asia, China has taken some of the strictest measures yet to restrict short selling and quantitative trading strategies in an effort to support the country's deteriorating stock market. At the same time, the financial regulatory body has asked certain banks in rural areas to reduce the average duration of their bond holdings, as authorities seek to protect the banking sector, according to sources familiar with the matter.
Elsewhere, the Malaysian central bank kept its benchmark interest rate unchanged on Thursday, allowing it to assess the potential impacts of rising consumer prices with the government's removal of fuel subsidies. Economists also expect the central bank in Peru to maintain its interest rates at 5.75% in its meeting held yesterday.
