Policy change comes into view as LatAm market pummeling continues
Latin America’s falling currencies may be reaching a “critical juncture” where they could start to catalyze outflows of foreign cash or prompt central bank action, say analysts
The sustained weakness in Latin American equity, bond and
currency markets could drive rate hikes, or further push
international investors out of the region, analysts said on
While the slump in Latin currencies is not "symptomatic of
an internal crisis" in the region, central banks may be
approaching the limits of their tendency to tolerate
export-supporting weaker exchange rates, Siobhan Morden, head
of Latin America fixed income strategy at Jefferies, said on
The Colombian peso has fallen 5.2% against the dollar since
the start of the year, while the Brazilian real depreciated
1.3% and the Mexican peso 2.3%.
"The latest FX weakness may now have reached a critical
juncture whereby it could [catalyze] outflows of foreign
holdings or alternatively, contaminate the inflation/growth
trade-off for central banks," Morden said in a research
Brazil and Peru’s central banks have
"significant firepower" to address currency weakness, while
Chile and Colombia may intervene if contagion threatens the
real economy, she said.
"Mexico perhaps faces the most challenging policy dilemma
with less firepower to fund the outflows and not much
flexibility to tolerate FX weakness," Morden added.
But Mexico is likely to be the least affected country if the
problems plaguing emerging markets continue, said Bank of
America Merrill Lynch analysts.
They expect Peru’s central bank to raise rates
in the fourth quarter, or even earlier if the sol is hit.
Brazil’s central bank is likely to use rate hikes
and its swaps program as its "first line of defense", and so
may increase borrowing costs by 50bp — rather than the
25bp expected by the market — at its next meeting, the
"A continued rout on EM would drive the currency weaker than
what it is now, in our view, but we anticipate the Brazilian
Central Bank would tread much more carefully than Chile or
Mexico," BofA-Merrill analysts said on Tuesday.
The weaker currencies come as equity markets also suffer.
Brazil’s Ibovespa index lost 3.13% on Monday
— dragged down by a particularly dire day for shares
of Petrobras and construction firm Gafisa — while
Chile’s IPSA fell 1.34%, echoing losses in global
indices. The Mexican exchange was closed on Monday, but has
also suffered this year: it closed at 40,880 on Friday, down
3.8% from its early-January peak.
Still, planned equity deals including Grupo
Gigante’s sale of 253m shares in
Office Depot de Mexico are set to price this week,
Latin American debt markets are expected to have a slow week
after a turbulent start to the year. "I think this is going to
be a pretty quiet week. Until the market volatility clears we
are not going to see much going on in the way of new
a portfolio manager told LatinFinance on Monday.