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Emerging Markets See Relief Rally After Sell-Off on US CPI Data

(Bloomberg) — Emerging-market assets rebounded Wednesday from a selloff in the previous day that was triggered by faster-than-expected US inflation.

Developing-nation stocks rose 0.2%, notching up a third day of advances, driven by the consumer discretionary and communication service sectors, after a drop due to a reset in Federal Reserve rate expectations. Currencies also had some breathing room, with the Chilean peso and Mexican peso leading gains.

“Emerging-markets have made a return for the most part, with Latin America leading the way, primarily carried by a resurgent Chilean peso,” said Juan Perez, director of trading at IJʿ. “Yesterday’s dollar rally after U.S. CPI looked like an overreaction.”

Latin America once again proved resilient, with most of the region’s currencies shrugging off yesterday’s spike in US Treasury yields. The Chilean peso gained as much as 1.6% Wednesday, the top performer in emerging markets. Mexico’s peso also defied expectations and stayed well above the 200-day moving average of 17.3 per dollar.

“The MXN just remains a buy on dips for everyone out there and the fact that MXN/JPY is close to breaking higher is likely keeping a strong carry related undertone to the currency,” according to Brad Bechtel, global head of foreign exchange at Jefferies. “Party on in Latam.”

The 10-year US Treasury yields trended lower Wednesday after climbing over 13 basis points in the previous day, providing some relief for EM currencies. Still, it’s too early to judge whether the yields have reached a short-term top, according to Piotr Matys, senior FX analyst at InTouch Capital Markets.

“Should this potential technical scenario for US Treasury yields unfold, the dollar would most likely appreciate further against the EM currencies,” Matys said. In the bond market, Argentina’s dollar debt was the top performer in emerging markets as the country came back from the Carnival holidays. Notes due in 2030 rose 1 cent on the dollar, the biggest jump since December, according to indicative pricing data compiled by Bloomberg.

In Africa, Ghana President Nana Akufo-Addo replaced his finance minister as the West African nation looks to secure an agreement with commercial creditors on restructuring its debt. The country’s dollar bonds were among the worst performers among peers Wednesday, with the 2051s slumping 0.6 cents on the dollar to the lowest in two weeks. The change shouldn’t affect the continuity of Ghana’s external debt restructuring, according to Ricardo Penfold, managing director at Seaport Global Holdings.

In Asia, Indonesia’s Defense Minister Prabowo Subianto declared victory in Wednesday’s presidential vote, citing independent pollsters, putting him on course to lead Southeast Asia’s largest economy after two failed attempts. The offshore rupiah rose as much as 0.5% to 15,593 per dollar.

Despite an adjustment in rate cut expectations amid an understanding that the Fed will likely keep rates higher for longer, the global growth narrative is still alive, said Perez. “The general vibes seem to be pointed at an improved global outlook, especially as China gets serious on stimulus and easing.

Despite some inflationary woes here and there, the U.S. is an expanding economy that is also feeding momentum for its neighbors and allies south of its borders,” he said. “For now, headlines will dictate if any swings will come for the rest of a week characterized by the absence of Chinese activity in observance of the lunar new year.”

Reporting by Zijia Song

Juan Perez Senior FX Trader and Strategist IJʿ

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