EMERGING MARKETS-Record lows for currencies of Colombia, Chile as recession worries grip

By Susan Mathew July 6 (Reuters) – The currencies of Chile and Colombia hit new lows on Wednesday as rising recession fears and analysts’ warnings of sustained risk aversion, sent investors fleeing to safer assets. With major central banks, especially the U.S Federal Reserve, prioritizing inflation control over economic growth, emerging market currencies have taken a hit. MSCI’s emerging markets currency index is down almost 4% from 2022 highs ht in early March. “The prospect of a recession on both sides of the Atlantic is of course weakening EM currencies,” said Ulrich Leuchtmann, head of FX and commodity research at Commerzbank. “EM are likely to struggle to decouple from developments in the developed economies under these circumstances.” As copper prices tumbled to 20-month lows, top producer Chile’s peso slumped 1% to touch an all-time low of 964.21. The currency has been in record-low territory for two weeks now on copper demand worries as well as a strike at Chile’s biggest mining company Codelco. Crude exporters Colombia and Mexico also saw their currencies lose more than 1%, while Brazil’s real lost 0.6% to hit five-month lows, with volatility seen rising as October elections approach. Investors worry that Brazil’s fragile fiscal conditions could be exacerbated by populist policies leading up to the elections as far-right President Jair Bolsonaro seeks to gain back support from rival, leftist former President Luiz Inacio Lula da Silva, who is currently ahead in polls. “There have been increased pressures for more fiscal spending in Brazil when the fiscal health of the country is already compromised,” said TS Lombard’s Brazil economist Wilson Ferrarezi. “The central bank has been forced to keep hiking rates, which not only will have a negative effect on the economy in terms of activity, but also will increase the cost of public debt going forward.” Several developing market central banks have been on a hiking spree, Brazil’s being the most aggressive, to stay ahead of the U.S. Federal Reserve’s tightening cycle. Minutes of the Fed’s previous meeting are due at 2 p.m ET and will be parsed for clues on any commentary on inflation or change in policy stance. Technical analysis shows MSCI’s Latam currencies index could see a bigger correction, as could broader emerging market units. Emerging markets suffered a fourth straight month of portfolio outflows in June, notching the longest losing streak in seven years, data from the Institute of International Finance showed. In the last week of June, however, outflows from developed stock markets outpaced emerging markets, figures from BofA showed. Key Latin American stock indexes and currencies at 1425 GMT: Stock indexes Latest Daily % change MSCI Emerging Markets 980.91 -1.07 MSCI LatAm 1975.18 -0.6 Brazil Bovespa 98814.05 0.53 Mexico IPC 47456.42 -0.1 Chile IPSA 4999.70 -0.08 Argentina MerVal 92496.95 -0.208 Colombia COLCAP 1316.77 -1.27 Currencies Latest Daily % change Brazil real 5.4223 -0.63 Mexico peso 20.6920 -0.85 Chile peso 962 -1.05 Colombia peso 4320.6 -1.16 Peru sol 3.8601 -0.35 Argentina peso 126.3900 -0.15 (interbank) (Reporting by Susan Mathew in Bengaluru; Editing by Alexandra Hudson)