LATAM FX Talking: Domestic stories dominate

It has been a tough month for Latam currencies - largely due to domestic stories. We fear the Mexican peso has yet to see the worst of the selling pressure, as the Morena party pushes through unpopular reforms. Brazil’s real remains weighed down by fiscal concerns and weak China demand is hitting copper and Chile’s peso

Chris Turner

Global Head of Markets and Regional Head of Research for UK & CEE

Main ING LATAM FX Forecasts

	USD/BRL		USD/MXN		USD/CLP
1M	5.65	↑	20.50	↑	950	↑
3M	5.50	↓	20.00	↓	950	↑
6M	5.50	↓	19.00	↓	950	↑
12M	5.50	↓	19.00	↓	950	→

USD/BRL: 'Fiscal steroids'

Spot	One month bias	1M	3M	6M	12M
USD/BRL 5.5992	Mildly Bullish	5.65	5.50	5.50	5.50

Some have described Brazil’s strong economic growth of 2Q24 as being driven by ‘fiscal steroids.’ And certainly, it is the fiscal side weighing on the currency right now. The rolling 12-month budget deficit is now 10% of GDP and expectations of fiscal rectitude are low in 2025 as the Lula administration prepares for elections in 2026. Despite promising a balanced primary budget in 2025, investors question government revenue forecasts.
Weakness in the real and rising inflation expectations now has the market pricing in a 175bp tightening cycle starting 18 September. Failure to deliver on that could hit the real.
In late August the central bank sold $2.2bn in spot markets to defend the real. Expect more intervention over coming months.

USD/MXN: Morena pushes on with judicial reforms

Spot	One month bias	1M	3M	6M	12M
USD/MXN 19.97	Mildly Bullish	20.50	20.00	19.00	19.00

The peso remains under pressure as the Morena administration pushes ahead with its plan to reform the judiciary. Recall the plan is to have judges, even supreme court judges, elected by popular vote – threatening their independence. Despite financial market unease, these reforms have already passed by a two-thirds majority in the lower house and now head into the Senate. Passage in the Senate could trigger another leg lower in MXN.
Banxico is trying to hold a dovish line here citing the better path for core inflation. Rates are expected to be cut 175bp over the next year, although a move on 26 September may be too early.
A lower USD/JPY won’t help the MXN recover quickly either.

USD/CLP: Scope for faster rate cuts weighs on peso

Spot	One month bias	1M	3M	6M	12M
USD/CLP 944.00	Neutral	950.00	950.00	950.00	950.00

USD/CLP has drifted back to the 950 area, driven by both y softer copper prices and more recently by the last central bank rate cut to 5.50%. It was not the 25bp adjustment which hit the peso, but more the statement saying that rates could be cut faster to neutral (4.25%?). With real rates already relatively low in Chile, the peso did not like the news of further and quicker rate cuts.
Our commodities team thinks copper prices could stabilise around current levels ($9000/MT), helped by Fed easing and weak Chinese demand already being priced into the metal.
US elections pose a significant risk to the peso were trade wars with China to ratchet higher to a new level.

Download

Download article

This article is part of the following bundle

10 September 2024

FX Talking: Soft landing or recession? This bundle contains 6 articles

Author

Chris Turner

Global Head of Markets and Regional Head of Research for UK & CEE

Content Disclaimer
This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more