FXFX Talking
Latam FX: Lula knows best
It has been a good start to the year for Latam currencies. We continue to prefer the Mexican peso in the region, where its high risk-adjusted returns will remain in demand. The Brazilian real will probably win fewer friends. The Lula administration's desire to push the fiscal limits and get involved in monetary policy will not be greeted well by investors
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Main ING Latam FX forecasts
| USD/BRL | USD/MXN | USD/CLP | ||||
| 1M | 5.10 | → | 18.75 | ↓ | 775.00 | → |
| 3M | 5.10 | ↓ | 18.60 | ↓ | 800.00 | → |
| 6M | 5.20 | ↓ | 18.50 | ↓ | 825.00 | → |
| 12M | 5.30 | ↓ | 18/50 | ↓ | 800.00 | → |
USD/BRL: Health warnings attached
|
Spot
|
One month bias | 1M | 3M | 6M | 12M |
|---|---|---|---|---|---|
|
USD/BRL
5.1524
|
Neutral | 5.10 | 5.10 | 5.20 | 5.30 |
- USD/BRL is trading towards the lower end of its six-month trading range, but arguably should have been trading below 5.00 given the better global backdrop. Upward revisions to global growth – led by China and India – plus a sharp improvement in Brazil’s terms of trade should have seen USD/BRL trading to 4.80.
- Yet the internal conflict between fiscal and monetary policy (between the government and the central bank) remains a concern. President Lula’s administration wants to loosen fiscal policy and raise the inflation target – un-nerving investors.
- Should politicians interfere with the election of a new central bank board member in February, or should fiscal rules be loosened further, USD//BRL could easily trade to 5.30/40.
Refinitiv, ING
USD/MXN: Peso looks good
|
Spot
|
One month bias | 1M | 3M | 6M | 12M |
|---|---|---|---|---|---|
|
USD/MXN
19.054
|
Mildly Bearish | 18.75 | 18.60 | 18.50 | 18.50 |
- USD/MXN has virtually unwound the entirety of the 2020/22 pandemic and energy supply shock to trade back close to the 18.50 lows. The very credible fiscal (Mexico 5-year CDS at 120bp vs. 233bp for Brazil) and monetary (real rates are +2%) situation are strong drivers for MXN demand.
- Banxico continues to match the Fed in its tightening cycle, meaning that the policy rate will be taken close to 11% by the end of the quarter. Not bad with inflation running at 8.5%. And as the market takes a greater interest in carry, 3m MXN implied yields at 11.40% provided very strong risk-adjusted carry.
- The Banamex sale or high US inflation pose the biggest threats.
Refinitiv, ING
USD/CLP: CLP gains could run into reserve accumulation story
|
Spot
|
One month bias | 1M | 3M | 6M | 12M |
|---|---|---|---|---|---|
|
USD/CLP
796.85
|
Neutral | 775.00 | 800.00 | 825.00 | 800.00 |
- A reset on our global macro and dollar view means we are having to revise down our USD/CLP forecasts significantly. A weaker dollar, better Chinese demand and now supply disruption in Peru is settling copper at stronger $9,000-10,000/MT levels – helping CLP.
- Locally, the Chilean economy continues to rebalance after the excesses of 2021 – which created the huge current account deficit. Weaker domestic demand (GDP forecast at -1% this year) is helping the trade surplus back into a big positive.
- The reason we are not forecasting USD/CLP to return to the 700 area seen in summer 2021 is that we suspect it will want to take advantage of CLP strength and rebuild FX reserves. These halved last year as the central bank fought the peso crash.
Refinitiv, ING
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This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
↑ / → / ↓ indicates our forecast for the currency pair is above/in line with/below the corresponding market forward or NDF outright
Source (all charts and tables): Refinitiv, ING forecast