Differentiated performance for LATAM FX - Scotiabank

LATAM FX has come under pressure recently, as markets reassess the outlook for global rates but analysts at Scotiabank feel that there is still a differentiated performance based on individual macro stories (i.e. Brazilian real, or BRL, underperforming due to political uncertainty), and valuations (the Mexican peso—MXN—recovering from its post-US election slide).

Key Quotes

“One of our main concerns for regional FX is that if we were to see a bout of global risk aversion, given the buildup of long-LATAM positions witnessed over the past 18 months (or more recently for the MXN), there could be a relatively sharp sell-off. In addition, even though the region’s yields remain attractive, there could be some political volatility given the uncertainty generated by a heavy pipeline of Presidential elections (Chile, Colombia, Mexico and Brazil will all elect new Presidents by the end of 2018). Hence, the currencies of the two countries where political uncertainty seems highest (Brazil and Mexico), are the two where our forecasts are less constructive.”

“For the MXN, even though we don’t foresee a sharp sell-off, we anticipate some upward pressure for the dollar cross driven by political uncertainty related to the 2018 elections. In addition, the start of the formal NAFTA negotiations in August 2017 could generate some uncertainty (although from a pure valuation perspective, MXN remains cheap). In Brazil, we expect continued uncertainty on the political front and a tougher outlook for reform approvals to weigh on the BRL. In the Andean currencies, we expect sideways trading given a stable macro outlook, accompanied by mediocre growth. The case for relatively steady Andean FX is boosted by our expectations of relatively steady commodity prices.”