Interest rate jitters, recession worries crush Latam FX

Sept 23 (Reuters) – Brazil’s real and Chile’s peso dropped over 2.5% each on Friday, leading a sell-off across emerging market currencies as investors were gripped by fears about a global recession, driving the safe-haven dollar to 22-year highs.

Data showed a drop in business activity across the euro zone and Britain feeding fears of a global economic downturn that followed interest rate hikes and hints of more by the Federal Reserve and other central banks this week.

Risk-off sentiment prompted a sell-off of Brazil’s real a day after the central bank intervened to support the currency, selling USD 2 billion in the spot market with a repurchase agreement. The real was on track for its sharpest daily fall in five months.

Crude oil and metal prices slid on worries about weaker demand. Mexico’s currency fell 1.2% and Colombia’s fell 1.7%. Top copper exporter Chile’s peso marked its third straight week in the red.

“Over the next couple of weeks, long-term investors may hesitate buying into weakness because it doesn’t seem like any economic data release or Fed speak will convince markets that a downshift from this aggressive tightening campaign will be happening anytime soon,” said Edward Moya, senior markets analyst, the Americas at Oanda.

Latam currencies have fared better than broader emerging market peers as regional central banks started their hiking cycles early and went big, staying ahead of the Fed.

Regional assets also benefited from the rise in commodity prices earlier this year. The Brazilian real has seen volatility in the run-up to elections in October, but is still up 6% for the year.

“(Brazil’s) fiscal revenues have consistently surprised on the upside over the past 12 months,” said Elizabeth Johnson, managing director of Brazil research at TS Lombard.

“The outlook for 2023 remains much more challenging, largely because of the massive increase in election-related government spending,” she warned.

Among stocks, Argentina’s main index plunged 4.2%, while Colombia’s COLCAP lost 3.4%. Brazil and Mexican indexes lost well more than 2% each.

After a central bank heavy week, investors will be watching for more decisions next week, including from monetary authorities in Hungary, Mexico and Colombia, with all expected hike rates.

In Colombia, analysts are split, with eight of the 17 analysts polled forecasting a 100 basis points hike, taking the key interest rate to 10%, while another eight expect a 150 bps rise.

(Reporting by Amruta Khandekar and Susan Mathew; Editing by Andrea Ricci and David Gregorio)