Latin America Currencies Drop on Politics, Faded China Optimism

(Bloomberg) -- Latin American currencies weakened on Wednesday as the dollar jumped and optimism faded over the impact of China’s stimulus measures.

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The Mexican and Colombian pesos were among the worst performers, weighing on a gauge of emerging-market currencies, which eked out a 0.2% gain for the day.

“The market is probably realizing that the measures are not necessarily a game changer for China growth,” said Erick Martinez Magana, a strategist at Barclays in New York.

China’s central bank lowered the interest rate charged on its one-year policy loans by the most on record, adding to a series of stimulus measures announced on Tuesday. But the step failed to extend a rally in commodity prices that had boosted the region’s currencies yesterday.

The Mexican peso weakened as much as 1.8% against the US dollar on Wednesday, hitting session lows after Moody’s Ratings commented that the recently approved judicial reform may directly affect the nation’s credit profile. The peso has been under pressure amid US election risks and higher political uncertainty at home.

The market is also pricing in a dovish outcome from Thursday’s central bank meeting, with Mexican policymakers expected to cut interest rates after the country’s headline inflation slowed more than expected in early September, according to Martinez Magana.

The MSCI equity index for emerging economies advanced 0.4%, extending its longest winning streak since early-July. The index continues to trade at its highest level in more than two years and is heading toward a monthly gain after closing August in the red.

Pakistan secured final approval Wednesday to start a $7 billion loan program from the International Monetary Fund, unlocking crucial financing to sustain the nation’s recovery from a crisis.

Argentina’s government may combine the final two staff-level reviews of the current $44 billion IMF program into one, and then proceed with negotiations for a new program that would take about three to six months, Economy Minister Luis Caputo said, according to people with knowledge of his closed-door presentation at JPMorgan Chase & Co.’s offices in New York.

Meanwhile, Sri Lanka’s dollar bonds climbed to outperform emerging peers as new president Anura Kumara Dissanayake dissolved the nation’s parliament and called for early elections. Ecuador’s bonds, however, were among the worst performers as the nation grapples with blackouts due to severe drought and forest fires affecting the capital Quito.

--With assistance from Jorgelina do Rosario, Vinícius Andrade and Nicolle Yapur.

(A previous version corrected paragraph five to refer to Mexico’s credit profile.)

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