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Markets

Mexico leads Latam losses as rising yields, dollar dent FX

  • Bolstered by a strong rise in US producer prices, a fresh spike in US Treasury yields sparked a risk-off move, with the dollar reversing its fall from earlier in the week.
  • These legal setbacks will only intensify (President Andres Manuel Lopez Obrador's) desire to change the constitution to shield his energy-sector vision from further legal setbacks down the road.
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A surging dollar and rising bond yields dented emerging market currencies on Friday, with Mexico's peso losing more than 1.5%, while developing market stocks also lost ground.

Bolstered by a strong rise in US producer prices, a fresh spike in US Treasury yields sparked a risk-off move, with the dollar reversing its fall from earlier in the week.

An index of EM currencies fell up to 0.2%, tipping it into the red for the week. Commodity-rich Latin America's currencies were hit further by a slide in oil, copper and iron ore prices.

Brazil's real lost 0.4%, while top copper producer Chile's peso fell after three straight days of gains. Colombia's currency gave up 0.6%, and gained the least among regional peers on the week - up about 1.8% compared with a 2.1% rise for an index of Latam currencies.

A pull-back in US bond yields on easing inflation fears had given a fillip to EM assets earlier in the week.

Brazil's real was set for its biggest weekly rise in two months, supported by central bank intervention and rising expectations of an interest rate hike next week. After intervening throughout the week, the central bank said it will sell up to $750 million of FX swaps on Friday.

Mexico's peso lost up to 1.7%.

Finance Minister Arturo Herrera told Reuters that Mexico's government will study the need for a tax reform this year and is talking to regional authorities about their fiscal requirements to see if it is warranted.

A Mexican federal judge on Thursday ordered a temporary freeze to a new electricity-market law championed by the government that strengthens national power company CFE at the expense of private sector producers.

"These legal setbacks will only intensify (President Andres Manuel Lopez Obrador's) desire to change the constitution to shield his energy-sector vision from further legal setbacks down the road," said Citi Research strategists.

Political interference in economic policy is one of significant risks cited by analysts broadly for investor sentiment to turn sour against Latam assets.

In Argentina, bonds have hit lows in recent weeks, but analysts and investors say they are still no bargain, given stalled talks with the IMF, fears about a pre-mid-term election spending binge and dry weather denting crops.

Emerging market stocks lost 0.9%, with losses among Latam bourses being led by Brazil's Bovespa losing 1%.

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