Early rate hikes a boost to Latin America currencies as inflation fears grow
Despite some notable challenges, Latin American currencies could continue to surprise in the second half of the year.
Latin American FX has been surprisingly resilient on the back of good carry and strong commodities and has received a further boost from cautious central banks that started hiking rates earlier than in developed markets.
This was the view of JPMorgan analysts in a recent research note, but there are several reasons why this resilience could be sorely tested in the coming months. These include low expectations for significant appreciation against the dollar as commodities weaken and high inflation limiting real rates improvement.
COP has a large current account deficit and we expect political risk premia to remain high
Latin American central banks – which began battling inflation eight to 12 months ahead of the US Federal Reserve – have continued to hike policy rates to levels as high as 13.25% in Brazil and 9% in Chile during the first quarter. During this time the Chilean peso and the Colombian peso gained around 10% and the Brazilian real appreciated by approximately 19%, explains StoneX FX trader Daniel Socci.
“As the Federal Reserve commits in earnest to tackling inflation in the US, carry will begin to erode,” adds Socci.