Report11 January 2019Updated 3 months ago

LATAM FX Talking: January forecast update

Over the past month, LATAM FX experienced a substantive correction on the back of improved risk appetite, but domestic drivers also played an important role, particularly in Brazil and Mexico 

Executive summary

For the BRL and the MXN, a more extended period of improved risk appetite, along with a benign domestic political news cycle, could push these currencies into what we would consider “overshooting” territory.

Mexico should continue to benefit from the highly attractive carry, amid signs that the Lopez Obrador administration is now settling into a more conservative policymaking stage, after having solidified some key controversial “political victories” in recent months. Even though we believe the MXN should be trading above 19, there’s now a greater risk that the currency could overshoot towards 18.5.

In Brazil, all eyes should be on the new Congress, which will be inaugurated in February and is expected to initiate immediately the debate on the social security reform to be proposed by the Bolsonaro administration in the next month. Predicting the near-term BRL path should continue to be quite difficult, however, as any signs of political difficulties in garnering enough votes in Congress is bound to trigger volatility, while the currency’s performance following the reform’s vote remains clearly binary.

Elsewhere in the region, the evolution of trade-war concerns and its impact on China and commodity prices should play a crucial role, with the March 1 deadline for new US tariffs looming on the horizon. Depressed commodity prices led to a massive FX weakness across the Andes, with Colombia’s COP and Chile’s CLP consistently posting the worst performance in the region for several months. Having corrected so much, there appears to be particularly large room for recovery in this segment, conditional on favourable developments on the commodity’s front.

Investor sentiment has also improved towards Argentina, where the central bank started a small-scale FX intervention program, buying USDs as the ARS strengthened beyond its non-intervention zone. Price action indicates that implementation of the stringent monetary program introduced last year has been successful, which should gradually create a path for authorities to ease monetary conditions in the coming months.