NEW YORK — Bank of America expects a moderate appreciation on some Latin American currencies in 2021 as regional central banks raise rates to fight inflation and U.S. rates remain stable.
In a research note, analysts Gabriel Tenorio and Claudio Irigoyen forecast a better year-end performance for Mexico and Colombia’s pesos, while the Brazilian real and the Peruvian sol may see some downward trend. “Fast progress in the vaccination effort could contribute to stronger LatAm FX,” the analysts wrote in a report dated September 15. “However, fiscal and political uncertainty will remain important drivers of volatility in some countries.”
The analysts are “neutral” on the prospects of the Mexican peso (MXN), and see the currency gaining some ground vs the U.S. dollar by the end of the year. “Relatively high policy rates, stronger growth outlook and lower headline risk are positive for MXN.” They see it ending the year at 20.5/USD vs a previous call of 21/USD, outperforming other emerging markets currencies as well.
A conservative Banxico, as the central bank is known, will likely continue raising rates into year-end to offset inflationary pressures. “We forecast the overnight rate at 5.25% by the end of this year and on hold during next year. This will keep the peso in the upper end of the range in terms of carry, helping it outperform,” according to the report.
BofA projects Mexico’s gross domestic product will expand 6% this year and 3.5% in 2022, with the U.S. economy helping “through strong exports and high remittances.”
Banxico’s policymakers will announce its next monetary decision on September 30. “Facing high inflation, we expect Banxico to hike three more times this year, 25bp each, to put the rate at 5.25% by year end,” economist Carlos Capistran wrote in a separate report dated August 23. “But we believe Banxico will then pause and wait for the Fed to continue hiking despite high inflation (we expect the Fed to hike until 2023).”
Brazil
Bank of America says that higher interest rates set by BCB are positive for the Brazilian real (BRL), “but political noise, fiscal risk and negative flows could bring volatility.” Brazil’s central bank is expected to raise its reference interest rate, Selic, in its next meeting on September 22, and the analysts project that the monetary authority will keep its hawkish tone, bringing Selic to 8.0% by year-end vs 5.25% currently.
Given the escalation of the political risk, “strong frictions between the executive, legislative and judiciary branches”, the bank raised its year-end target for BRL to 5.1/USD vs a previous call of 5.0/USD.
Argentina
The bank is “bearish” on Argentina’s peso (ARS). “The peso is overvalued and will likely correct after the November elections. IMF deal would be positive,” the analyst said in the report, adjusting their year-end target for the official ARS to 114/USD from 116/USD.
Argentina’s central bank has improved its international reserves position mostly as a result of the increased SDR allocation from the International Monetary Fund, putting the net amount at USD 11billion, the highest level since April 2020, the analyst wrote. “However, we think the exchange rate needs to depreciate in real terms in order to allow the central bank to continue accumulating reserves.”
The bank expects a correction on the official exchange rate likely taking place after the November 14 mid-term election. “This should happen through an acceleration of the crawling peg, but after the recent drop in soybean prices we don’t rule out small jumps,” they said.
The results of the September 12 primaries, with the opposition coalition defeating the ruling political force, has positive market implications given higher perceived regime change odds in 2023, “but it also increases uncertainty about economic policy management and the outlook of the IMF negotiations,” the report said.
COP, PEN Outlook
With the tax reform approved and Colombia’s central bank likely to start raising rates on its September 30 meeting, Bank of America sees room for the Colombian peso (COP) to strengthen. Having a “bullish” stance on the currency, they estimate COP will end the year at 3,750/USD level vs a previous forecast of 3,800/USD, with BanRep hiking rates to 2.5% at the close of 2021.
“Main risk to our view would be social/political noise picking up once again and the current account widening substantially,” the analysts wrote.
The Peruvian sol (PEN) will probably remain weak on the back of high political uncertainty, in spite of recent hiking rates by the central bank BCRP, and Bank of America expects the currency to end the year at 4.1/USD compared to a previous call of 4.0/USD.
Politics will remain the key driver for the Chilean peso (CLP) as the November presidential elections approach, the analysts said, while “further rate hikes should help counter some volatility.” The nation’s central bank, BCCh, raised its interest rate by 75 bps to 1.50% in August, exceeding analyst’s estimates of 1.25%.
Bank of America considers that higher policy rates could help to reduce the near-term volatility of Chilean peso. “We expect the rate at 2.25% and 3.5% by the end of this and next year, respectively. However, the risk is for even higher rates if there is a market unfriendly election outcome.”
Chile will holds the first round of its presidential election November 21 and the runoff on December 19. “We would expect the exchange rate around 820-830 if there is a market-unfriendly election outcome, and around 740-750 for a market-friendly outcome,” the analysts said. BCCh holds its next monetary meeting October 13.
