FX Insights: Latin American Currencies Under Fire

Since mid-year, Latin American currencies have been under fire.

The Argentine peso suffered a massive meltdown, and other Latin American currencies have fared poorly. As shown in Table 1 below, the Argentine peso, Brazilian real, Chilean peso, and Colombian peso were the worst performing currencies, and they all underperformed the Asian EM currencies. The Mexican peso and Peruvian sol performed slightly better.¹

Table 1: Asian and Latin American 
Currencies vs. USD (spot return %)                  Table 2: Latin American fundamental & market-driven factors (Q2 2019, QoQ, WSJ)

A variety of factors help explain the weaknesses we’ve seen in the Latin American currencies: 

• Continuous current account and government budget deficits throughout Latin America (see Table 2 above) always give global investors cause for concern.
• Emerging Market currencies are highly vulnerable to worldwide economic dislocations. US-China trade tensions, fear of a global economic slowdown, and higher volatility in financial markets all translate into an increase in the risk premium for EM countries.
• Many EM countries have significant USD denominated debt. The relentless strength of the dollar combined with relatively high US interest rates have put additional pressure on Latin American currencies.

ARGENTINA

• The Argentine peso is trading near 56.50. ²The currency dropped a full quarter in value after Peronist candidate Alberto Fernandez’s victory in the August 11 primary elections, heightening concerns about the upcoming October 27 presidential election.  
• Investors reacted by dumping Argentine assets when it became clear that Mr. Fernandez’s vice presidential candidate was Cristina Fernandez de Kirchner. She was the country’s former president who took the country’s budget from near balance to a deficit of 7% of GBP.
• The government’s reaction was to quickly “re-profile” its external long-term debt and delay short-term debt payments. Last week, it imposed capital controls to stabilize the currency and slow the panic buying of US dollars.
• Argentina’s economic outlook has worsened due to the financial crisis, and investors now predict an economic contraction due to declines in investment, economic activity and investor confidence.

• Bloomberg’s Forecast Survey for USD/ARS ³: End-of-Q4 ’19 65; Q1 ‘20 70; Q2 ‘20 70; Q3 ‘20 65  

BRAZIL

• The Brazilian real is trading near 4.0960. ⁴ In August, it suffered its worst month in four years, triggering central bank intervention in the spot FX market for the first time since 2009.
• Brazil’s economy rebounded solidly in Q2, fueled by 1) foreign investments, 2) improved industrial production, and 3) loose monetary policy. Incoming data for Q3 has been mixed. Export growth may contract, as China and Argentina are key trading partners of Brazil.
• Early in the month, a critical pension reform gained Senate approval and the country passed a bill to boost savings for local governments.

• Bloomberg’s Forecast Survey for USD/BRL ⁵: End-of-Q4 ’19 98; Q1 ‘20 3.90; Q2 ‘20 3.90; Q3 ‘20 3.82

CHILE

• The Chilean peso is trading near 716. ⁶ The peso has been hurt by copper prices, which have dropped by 16% from their highs this year ⁷ (Chile is the world’s largest producer of copper).
• Chile is regarded as Latin America’s most stable economy, but the US-China trade war could undermine its success (China is Chile’s largest trading partner).
• The center-right government of Sebastian Pinera has lost popularity amidst high unemployment. Pinera also lacks a majority in Congress, which will restrain the realization of the ambitious reforms he has promoted.

• Bloomberg’s Forecast Survey for USD/CLP ⁸: End-of-Q4 ’19 706; Q1 ‘20 700; Q2 ‘20 693; Q3 ‘20 693 

• Interesting development last week: Chile’s central bank president Mario Marcel announced measures to promote the internationalization of the Chilean peso and Chile as a regional financial hub (a la Singapore). ⁹

COLOMBIA

• The Colombia peso is trading near 3378. ¹⁰ It fell in August, as foreign investors pulled money out of Colombia’s sovereign bonds.
• Colombia’s economy lost momentum in Q2 after growing at the fastest pace in over three years in Q1. Upbeat Q2 data was seen in private consumption, capital spending, and employment. Industrial production in July showed the strongest increase nearly a year. ¹¹
• President Ivan Duque’s administration is hampered by lack of a majority in Congress, low approval ratings, and worsening security in rural areas (a former FARC guerrilla leader wants restart the war against the Colombian state¹²).

• Bloomberg’s Forecast Survey for USD/COP¹³: End-of-Q4 ’19 3375;  Q1 ‘20 3375; Q2 ‘20 3350; Q3 ‘20 3275

MEXICO

• The Mexican peso is trading near 19.35. ¹⁴ The peso has benefited from the US-Mexico trade deal, which has been more successful than expected. Attractive interest rates -- short-term (for the popular USD/ MXN “carry trade”) and long-term, along with foreign investor confidence in President Obrador have boosted the value of the peso.
• Economic growth is expected to slow in 2020, pulled down by an unhealthy combination of weak domestic demand, sluggish fiscal stimulus, lower business confidence and reduced investment and consumption. We expect the peso to feel the effects of anti-Mexico tweets from President Trump in the run-up to the 2020 elections.

• Bloomberg’s Forecast Survey for USD/MXN¹⁵: End-of-Q4 ’19 75;  Q1 ’20 19.85; Q2 ’20 19.75; Q3 ’20 19.80