By Nikhil Sharma and Purvi Agarwal
Latin American currencies broadly strengthened against the dollar on Thursday, as investors assessed the implications of mounting U.S. fiscal debt, while stocks were weighed down by commodity prices.
Trepidation over America's ballooning national debt intensified as the U.S. House of Representatives passed President Donald Trump's tax and spending overhaul, a bill anticipated to significantly increase the country's debt burden.
This mounting fiscal pressure was a key catalyst behind Moody's decision last week to strip the U.S. of its top-tier credit rating.
Investors, already skittish from Trump's unpredictable tariff pronouncements, are trimming exposure to U.S. assets in a bid to cultivate more geographically diversified portfolios and piling into EM assets.
"Latam currencies are not a speculative assets. The confidence right now is momentary because we have seen recent weakness in the dollar, but due to political problems that we have in the region, the competency will not maintain for the long term," said Julian Pineda, market analyst at StoneX.
On the day, the Argentinian peso FX_IDC:USDARS was up 1% against the dollar.
The country is easing foreign currency reporting rules to encourage residents to start using an estimated $271 billion in cash dollars, long held as a hedge against economic turmoil.
Mexico's peso FX_IDC:USDMXN ticked up 0.2% after the country's headline inflation rose more than expected in the first half of May, data showed, jumping outside the central bank's target range for the first time this year.
Separate data revealed the economy shrank 0.4% in March from February, while expanding 2.5% from March of 2024.
These indicators throw a wrench into the Bank of Mexico's monetary easing ambitions. The central bank, having last week delivered a 50-basis-point cut to its benchmark rate and hinted at further reductions, now faces a delicate balancing act.
"Today’s data should be neutral for policy, especially considering that the next Banxico decision is over a month from now... we keep our expectation of a 50bp cut in that meeting," said analysts at Deutsche Bank.
Currencies in Chile FX_IDC:USDCLP and Peru FX_IDC:USDPEN strengthened 0.1% and 0.5%, respectively, against the greenback, despite a dip in copper prices.
The Colombian peso FX_IDC:USDCOP slipped 0.3% as oil prices fell on global supply risks following a report that OPEC+ is discussing a production increase for July.
Brazil's real FX_IDC:USDBRL slipped 0.2%. A government report highlighted the need to contain 31.3 billion reais ($5.58 billion) in this year's budget to comply with the country's fiscal rules.
The country's central bank, which hiked rates earlier this month without providing any forward guidance, stressed the need for stable inflation before it could halt its policy tightening cycle.
Among stocks, ones in Mexico BMV:ME fell 1.3%, with Walmart's Mexico unit BMV:WALMEX down 2% and bottle maker FEMSA BMV:FEMSA/UB off 1.9%. Miner Grupo Mexico BMV:GMEXICO/B shed 1%.
Colombia's stock index BVC:ICAP dipped 0.8%, while heavyweight Brazilian equities BMFBOVESPA:IBOV were down 0.3% with energy and mining constituents bearing the brunt of the sell-off.
MSCI's gauge for regional equities (.MILA00000PUS) extended its slide from the prior session, shedding 0.5%.
Revenue from commodity exports such as copper, iron ore, crude oil and agricultural products is a key income for Latin American economies.
Elsewhere, Ukraine's bonds with 2035 (XS2895057177=TE) and 2036 (XS2895057334=TE) maturity fell more than 1 cent to the dollar as tension with Russia escalated after Moscow said it had shot down 105 Ukrainian drones over Russian regions, including dozens heading towards Moscow.
Key Latin American stock indexes and currencies:
Latin American market prices from Reuters
Equities
Latest
Daily % change
MSCI Emerging Markets CBOE:EFS
1165.06
-0.81
MSCI LatAm (.MILA00000PUS)
2244.85
-0.51
Brazil Bovespa BMFBOVESPA:IBOV
137419.91
-0.33
Mexico IPC BMV:ME
57833.4
-1.25
Chile IPSA BCS:SP_IPSA
8361.85
-0.67
Argentina Merval BCBA:IMV
2314477.82
-0.22
Colombia COLCAP BVC:ICAP
1636.09
-0.81
Currencies
Latest
Daily % change
Brazil real FX_IDC:USDBRL
5.6576
-0.23
Mexico peso FX_IDC:USDMXN
19.3045
0.24
Chile peso FX_IDC:USDCLP
942.26
0.13
Colombia peso FX_IDC:USDCOP
4176.5
-0.28
Peru sol FX_IDC:USDPEN
3.658
0.54
Argentina peso (interbank) FX_IDC:USDARS
1135.5
0.97
Argentina peso (parallel) (ARSB=)
1145
2.62