Over the past 3 months, we’ve seen LATAM currencies perform well, especially the BRL which recovered 10% during the course of April.
Of course, we have to split the more generic factors from the country specific ones. When the good times are rolling globally and money is plentiful, then domestic fundamentals tend to be overlooked. When the tide starts to go out then things are different and a currencies beta to domestic factors tends to increase as a result.
If we look at the respective domestic forces right now, then there is a fairly wide split and this has already been evident in the price action of recent weeks. I wrote last year regarding the Brazilian Real and how it had fallen out of the now tired BRICs acronym (Brazil, Russia, India & China), on the back of slowing economy and growing structural issues after years of lagging investment, amongst other things. The backdrop of a stalled economy and continued high inflation is likely to see the currency underperform in the second half of the year. The 3.80 – 4.00 range looks likely for USDBRL by the end of the year, with rate cuts doing little to stem currency depreciation.
On the other side of the LATAM currencies basket is the Mexican peso, where growth is more solid, inflation lower and the structural issues being faced are less acute than for Brazil. Despite the months of preparing the world for the eventual Fed tightening, it’s difficult to see EM currencies outperforming the dollar as this nears, but Mexico should manage to hold its ground against most others in LATAM, with a move towards the 18.0 level likely by year end.
The other currency worth watching is the Chilean peso. The recent decline in copper prices has exacerbated the weakening of the currency seen during most of May, with USDCLP moving above the 620 level in early June. Chile’s reliance on China as a trading partner also makes for a more cautious outlook, especially given what we are seeing in the stock market.