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Most Latam FX gain against softer dollar; stocks track global equities higher

  • Colombia's public debt could climb the equivalent of 10% of GDP.
  • EM economies and markets running on fumes – SocGen.
  • Political uncertainty weighs on Peru's sol.
  • Brazil, US cenbank meetings eyed this week.
Updated 14 Sep 2020

Latin American currencies firmed against a weaker dollar on Monday, while lower oil prices and forecasts for a higher debt to GDP ratio for Colombia saw its currency underperform other major emerging market peers.

Crude exporter Colombia's peso was flat as demand concerns and Libyan supply weighed on oil prices.

Colombia's public debt could climb the equivalent of 10% of gross domestic product this year due to the coronavirus pandemic, the country's comptroller said on Friday, warning that this could affect efforts to reduce poverty and unemployment.

Most other currencies rose as the dollar slipped ahead of the US Federal Reserve's policy announcement on Wednesday. A central bank meeting in Brazil and minutes of Chile's last rate meeting are also awaited this week.

Unprecedented stimulus measures adopted globally have helped most emerging market currencies recover fully from year-lows hit in March when the novel coronavirus disease began wreaking economic havoc around the world.

But scope for further policy accommodation by EM central banks may be dwindling, analysts at Societe Generale wrote in a note.

"EM is running on fumes, suggesting downside risks exceed upside potential," they said.

"EM now sorely lacks a compelling impetus for investment, with growth drivers weak and yield compensation low... EM currencies are running on empty without capital inflows or a resounding macro narrative."

Brazil's real rose 0.5%. Data showed economic activity continued to rebound in July, but at a much slower pace than expected.

On Wednesday, Brazil's central bank will likely keep its benchmark rate unchanged and adopt a neutral view, a Reuters poll showed.

The real remains one of the worst-performing EM currencies this year. Amid worries about Brazil's fiscal standing, Economy Mister Paulo Guedes on Monday said the government will break its spending cap rule at some point unless mandatory spending tied to inflation is de-indexed.

Stocks in Sao Paulo rose, in line with global equities, as AstraZeneca resuming the trial for its COVID-19 vaccine candidate lifted sentiment.

MSCI's index of Latin American shares rose 1%. Mexico's peso hit six-month highs, while Chile's peso firmed 0.4%.

Peru's sol was flat after Congress approved a motion to start impeachment proceedings against Peruvian President Martin Vizcarra over leaked audio tapes and alleged ties to a singer involved in a fraud case.

"(The political uncertainty) will likely erode further business sentiment and investment prospects, which may have negative consequences in the much-needed economic recovery," said Credit Suisse analyst Alberto J. Rojas.