Emerging market currencies got a brief lift on Friday after US Federal Reserve Chair Jerome Powell’s comments at the Jackson Hole symposium came in line with expectations.
The US economy will need tight monetary policy “for some time” before inflation is under control, Powell said. He gave no indication of how high interest rates might rise before the Fed is done, only that they will move as high as needed.
Latin American currencies rallied, with all hitting session highs, but were soon back at levels before the remarks. Traders’ expectations of a 75 basis points hike rose following the remarks.
Brazil’s real jumped up to 1 percent before paring gains to last trade up 0.7 percent, while Mexico’s peso steadied after rising 0.4 percent.
Brazil’s central bank has been “quite aggressive” in raising interest rates, with much of that policy shift still to impact the economy, its chief said, cautioning that policymakers could not afford to “let their guard down.”
“(Powell’s speech) was pretty much in line with what we’re expecting,” said Simon Harvey, head of FX analysis at Monex Europe.
“They’re going to try and guide markets to the idea that they’re going to slow down the pace of hiking cycle, but they’re going to offset that with the idea that rates are going to be restricted for longer.”
Colombia’s peso rallied as much as 1 percent before trading back at 4,394.06 per dollar, while Chile’s peso added 0.7 percent.
The South African rand had erased session losses to rise 0.2 percent before trading back down 0.7 percent, while the offshore yuan deepened losses to hit session lows, last down 0.6 percent.
Emerging market stocks which had risen 0.6 percent, erased nearly all those gains.
“It’s kind of a double-edged sword in the sense that we’re seeing more recession risk being priced into US yields. But at the same time, we are seeing that idea that Fed policies are no longer going to be exerting the same amount of pressure on riskier yield sensitive emerging market currencies than it once did,” Harvey said.
