Reports
4 December 2020

LATAM FX Talking: FX gains as risk appetite solidifies

LATAM FX markets have turned decidedly bullish in the final weeks of the year. Despite lingering concerns, notably the fiscal weakness seen throughout the region, attractive valuations and favourable prospects for higher commodity prices and a faster recovery, as the region avoids additional Covid-19 disruptions, bodes well for a constructive 2021

Executive summary

Fiscal concerns are highest in Brazil, and much more modest in Mexico. But this difficulty in normalizing fiscal spending post-pandemic, and to bolster fiscal frameworks to return fiscal trajectories to a sustainable path, is playing out in most countries in the region, including in Chile, Peru and Colombia.

The 2021 outlook may also hinge on post-pandemic growth-trajectories, with noted upside for Brazil and Colombia. A constructive outlook for commodity prices should also benefit Andean FX in general, but political risk is high in Chile and Peru.

Overall, in this more benign environment from EM FX in general, and a weaker USD, we see greater scope for outperformance in Brazilian and Colombian assets. Mexican assets remain attractive, in our view, but the rally seen in recent months have brought local assets closer to fair value, in our view.

In particular, the COP and the BRL stand out in the region as the currencies with the strongest potential for appreciation in 2021. Even though the potential for appreciation appears largest in the BRL, the COP may offer the best risk-reward proposition.

Brazil’s fiscal outlook is much more challenging and less certain than Colombia’s, while we also see greater upside for Colombia’s oil-driven terms-of-trade than for Brazil’s more diversified export basket.

From a political risk point of view, Colombia also stands out as a safer alternative in LATAM, when considering the tumultuous 2021 electoral cycle projected for Peru and Chile, along with mid-term elections in Mexico and a very active Brazilian Congress that’s likely to keep headline risk elevated.


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).