LATAM FX Talking: The Brazil vs Mexico divergence gains steam

The external risk environment has turned slightly more benign with US-China trade tensions stabilizing and market relief provided by expected rate cuts in the US and Europe. The Brazilian BRL continues to stand out, even though we have recently moderated our appreciation trajectory for the Real. There is a weakening bias for the Mexican peso

Download pdf

LATAM FX Talking: The Brazil vs Mexico divergence gains steam

Executive summary

In the case of Brazil, the much-anticipated approval of the pension reform should reduce uncertainties related to the sustainability of the fiscal accounts and prompt an improvement in the outlook for economic activity and for local assets in general. But market reaction to the approval of the pension reform by the Brazilian Congress has been relatively muted this week, suggesting that much of the approval had already been incorporated into asset prices. Moreover, implementation of a relatively frontloaded monetary easing cycle, by as much as 150bp, starting with a 50bp cut on July 31, suggests that the BRL may lag other local assets.

The outlook for the Mexican peso has become cloudier, with lingering external trade uncertainties and, especially, the deterioration in the outlook for economic activity, as illustrated by the worrying contraction in industrial activity seen today, and the rising risk of credit rating downgrades, for PEMEX and the sovereign. Due to these uncertainties Banxico remains cautious about changing policy guidance, but a deeper divide appears to have emerged inside the board, as suggested by the monetary policy minutes released this week, and the bank appears now more inclined to follow the US Fed and cut the policy rate slightly. Having said that, intense policy focus on maintaining FX stability suggests that high rates should continue to act as the chief FX anchor in the nearer term.

Author

Gustavo Rangel

Chief Economist, LATAM

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).