A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, August 23, 2021. Photographer: Michael Nagle/Bloomberg The rally in risk assets follows the Fed’s aggressive start of monetary easing on Wednesday, which should help boost flows into emerging-markets as traders hunt for yield. The 50 basis point cut sparked gains that spread to Asian assets overnight and continue to ripple through global markets today as traders bet the Fed will be able to deliver a soft landing of the world’s largest economy.
“The more dovish Fed and a strong US economy should further improve financial market risk appetite and undermine the dollar against most EMFX,” said Elias Haddad, senior markets strategist at Brown Brothers Harriman. “In this environment, EMFX with high real and nominal yields, like the real and the rand, should outperform.”
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Investors also digested monetary policy decisions around the developing world. In addition to Brazil, South Africa and Turkey also decided on borrowing costs — the former delivered a cut while the latter held, both in line with economists’ estimates. The rand rose, while the lira traded flat versus the dollar.
Mexico’s peso, meanwhile, trailed most emerging-market peers. The Fed’s large cut is a signaled that the country’s central bank may have to cut interest rates at its Sept. 26 meeting, which could further erode its appeal. The currency should remain volatile amid ahead of President-elect Claudia Sheinbaum’s inauguration in October and the US presidential vote in November, according to Societe Generale.
In credit markets, Sri Lanka reached an agreement in principle with bondholders to restructure about $12.6 billion in bonds, just two days before the country heads to elections that have rattled investors. The government and bondholders agreed on terms including a “27% haircut on the nominal amount of existing bonds,” according to a statement.