MARKET NEWS

By Colleen Goko

(Bloomberg) -- An index of emerging-market currencies edged lower after trading flat most of the session, following fresh US inflation data that solidified bets that the Federal Reserve will lower interest rates.

The release of the consumer price index report offset some of the slump sparked by a weakening yuan earlier in the session, which dragged the MSCI currency index as much as 0.2% lower. Eastern European and Asian currencies led losses.

“The data was generally in line with expectations, so life goes on and so does the post-Trump consolidation process, or at least the first phase,” said Alejandro Cuadrado, a strategist at BBVA in New York. “A window of less volatility and less noise has opened.”

The Brazilian real was a standout gainer in Wednesday’s trading session, rising for a third consecutive day by as much as 1.8%. After market close, the country’s central bank raised the benchmark interest rate by 100 bps from 11.25% on Wednesday, doubling the pace of its tightening campaign for the second meeting. 

There’s been speculation around President Luiz Inacio Lula da Silva’s health since he suffered a fall in October. After undergoing brain surgery earlier this week, Lula needs to have a another medical procedure on Thursday to prevent further bleeding, according to a statement by the hospital where he’s being treated. The new developments come at a time were the government struggles to pass widely-anticipated spending cuts through Congress. 

Yuan tumble

Earlier in the session, the offshore yuan sank as much as 0.5% to 7.2921 per dollar after Reuters reported that Beijing may let the currency weaken further next year to offset the impact of potential US tariffs under President-elect Donald Trump. 

China’s yuan has been falling this quarter as policymakers intensify monetary stimulus to make exports more competitive. The depreciation raises risks of capital outflows and financial instability, challenges that could ripple through emerging markets tied to demand from the world’s second-largest economy as cheaper Chinese products undercut competitors in other developing economies. 

The correlation between China’s exchange rate and a broader developing-nation FX gauge climbed to the highest since June, underscoring how tariff strategies between the US and China remain a central risk.

The latest news about the Chinese currency adjustment would be akin to the 10%-15% depreciation during Trump’s first term, said Guillaume Tresca, senior emerging-market strategist at Generali Investments. 

“It is not a currency war per se but an adjustment to the impact tariffs could have on the Chinese economy,” he said, adding that weaker yields in China limit policymakers’ ability to allow sharp devaluation without exacerbating capital outflows.

--With assistance from Carolina Wilson.