LATAM FX Talking: Looking for strong domestic drivers
Rate cuts in the US, and possibly Europe, could bring some relief, but overall the market environment should continue to be more favourable for currencies that are less sensitive to external drivers. In that case, the Brazilian BRL stands out, while the commodity exporters in the Andes, notably Chile’s CLP, should continue to underperform
Executive summary
In the case of Brazil, all eyes will be on Congress, where the amended version of the social security reform is expected to be approved by the Special Committee by the end of the month. This would pave the way for the all-important first-round vote by the entire Lower House to take place by mid-July. Should the reform get approved, the BRL could experience the largest appreciation in the region over the next 3 months, possibly reaching the 3.3-3.4 range.
The FX rally would, meanwhile, be a chief catalyst for the central bank to implement a relatively frontloaded monetary easing cycle. Among other things, this should help limit the BRL rally and eventually help the currency to stability around equilibrium in the 3.6-3.7 range.
The outlook for the Mexican peso has become cloudier, with the renewal of external trade uncertainties and the faster-than-expected ratings downgrades. The latter could eventually trigger PEMEX-related financial instability, amid forced-selling, if the company is downgraded to “junk”. Those uncertainties should extend Banxico’s caution and delay a dovish shift for monetary policy, with high rates acting as the chief FX anchor.
In Argentina, investors reacted well to the running-mate choices made by both President Mauricio Macri and Cristina Kirchner, which appeared designed to polarize the campaign while, at the same time, bridge the gap between the two candidates, and take the oxygen out of the candidacy of Roberto Lavagna. The August 10 primaries will be the big event here, which should provide important clues about who will win the October race.
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