A year ago, emerging markets currencies were near universally running scared at the prospect of the Fed tapering bond purchases. A year later, the Fed has nearly finished tapering, but by and large emerging markets have not run for the exits. Indeed, there have been some bright spots and Latam has been amongst them. More recently, the B of BRICs (Brazil, Russia, India and China) has been one of the strongest EM performers from September 2013, this despite the fact that it can hardly be considered for inclusion in the outdated acronym now that it has fallen into recession. There is also a presidential election approaching, which is looking too close to call and will likely go to a second round towards the end of October. In some ways, Brazil is the opposite of China, the latter having seen massive (many argue too much) infrastructure investment pushing growth. For Brazil, investment has been much lower, growing at a slower pace and more recently has been falling (by 19% YoY in Q2). The real managed to pull away of the EM FX pack during the early part of the year (when rates were increased to 11%) and more recently has held firm, despite the worsening data on the economy. Depending on the election result, there could still be some further legs in the real rally and scope to test the year’s low of 2.1832 on USDBRL. That said, the pressure will be on for the central bank to reduce the selic rate next year, should the inflation picture allow. What’s clear is that the B in BRIC is looking increasingly mis-placed and that the economy has some major challenges ahead, whatever the result of the election.
Looking beyond the largest Latam economy, other currencies have still held their ground, most notably the Mexican peso, although it has not kept pace with the real. Growth in Mexico has performed much better recently and the country is naturally well positioned to benefit from the ongoing recovery in the US economy. There has also been a historic deal to open up Mexico’s energy market which also bodes well for a more reform-minded approach going forward. This should allow the Mexican currency to push ahead of the Brazilian real into year end and through into 2015. The outlook for Chile is not as rosy as further weakness in the economy could well mean more rate cuts are seen and this will put further pressure on the Chilean peso, which has already been under pressure over the past two months as the central bank has cut rates twice over this period. It is Argentina though that has caught the headlines more recently, given its technical default after a long-running dispute between Argentina and what were called ‘hold-outs’ on a bond-restructuring. The technicalities can be argued until the cows come home, but it has created a negative backdrop for the currency, which is likely to weaken further, despite having lost nearly 25% of its value vs. the dollar this year.