Latam FX dips as high treasury yields, Chinese concerns weigh

Latin American currencies fell on Tuesday as a rise in US Treasury yields pressured high-yielding assets, while dollar bonds of Chinese property firms plummeted on deepening concerns over widespread defaults.

Chile's peso slipped 0.6% to the dollar, tracking a decline in copper prices as concerns over Chinese demand weighed. The currency as the top decliner in Latin America (Latam).

Dollar-denominated bonds of mid-sized Chinese property developers slumped as concerns over a default drove a slew of ratings downgrades, while focus also remained on China Evergrande as it struggles to clear its massive $300 billion debt pile.

Concerns over the property sector, which accounts for about a quarter of China's gross domestic product, have also rattled Latam markets given the region's heavy dependence on China, as an export destination.

Currencies bounce as dollar eases, stocks headed for weekly losses

Brazil's real fell 0.4% after marking its worst day in more than a month on Monday, as concerns over political instability compounded weak trends in markets.

Data on Tuesday showed Brazilian industrial output fell more than expected, hurt especially by weak manufacturing of durable consumer goods as Latin America's largest economy struggles to recover from the COVID-19 pandemic.

A global semiconductor shortage has also stalled production in the country's massive automobile sector.

"Going forward, the industrial sector is likely to be impacted by tighter financial conditions, lingering supply chain frictions, significantly higher logistical and energy and other input costs, and potentially also energy supply restrictions," Goldman Sachs analysts wrote in a note.

Broader Latam and emerging market currencies fell as a rise in US Treasury yields narrowed the gap between risky and risk-free debt. Yields have been boosted since mid-September after the Federal Reserve affirmed plans to eventually trim monetary policy.

Sentiment towards emerging market currencies was also dented on Monday after JPMorgan turned "underweight" on the sector. Mexico's peso fell 0.5%. Central Bank Deputy Governor Jonathan Heath said the bank would likely hike rates one or two more times as it races to contain a recent spike in inflation.

A rate hike earlier this year had supported the peso, given that higher interest rates make the currency an attractive destination for carry trade.