Latin American currencies will benefit from rates and commodities

The coins Latin American firms are recovering from a dismal 2021 as investors learn to live with the region’s political risk and instead focus on rising local interest rates and rising commodity prices. At least two coins are likely to extend their gains.

Brazil, chili Y Peru they are the three emerging market currencies that have been the best performers this year, which represents a drastic change from 2021, when four of the six worst performers were Latin American.

“The coins Latin Americans are still very cheap at current levels”said Andrés Pardo, head of macro strategy for Latin America at XP Investments. The combination of higher interest rates and low valuations will likely “it will attract international accounts with a lot of money to increase exposure in the region”.

Pardo singled out the Brazilian real, which is about 40% cheaper than its fair value in real exchange rate terms and is among the coins most undervalued in the region. The Colombian and Chilean pesos are also quite undervalued, according to estimates. Rising prices for copper and iron ore, the countries’ main exports, and rising interest rates will make valuations more attractive. coins.

Latin American central banks were the first to raise rates last year, and those in charge of monetary policy in chili Y Colombia have surprised markets with sharp gains this year, in anticipation of the Fed’s tightening. Moreover, there is speculation of the possibility of emergency rate hikes in both countries as local inflation soars. Meanwhile, Brazilian monetary policymakers have raised borrowing costs to 10.75%, the highest level in nearly five years.

The coins are poised to rise further thanks to “more attractive valuations, idiosyncratic risk spikes, more aggressive tightening cycles and more robust commodity prices,” JPMorgan strategists Saad Sidiqui and Gisela Brant wrote in a note to investors. customers from February 10.

Most of these “idiosyncratic risks” are political after chili The US and Peru elected left-wing governments last year, and Colombia and Brazil are expected to do the same in 2022. Investors are now tempering those concerns, as the new wave of left-wing governments is unlikely to reverse the policies of the US economies. free market.

Raw Materials Boost

all major coins Latin American stocks have risen this year, defying the dollar’s slight gains. The Brazilian real leads the pack, up 8.7%, while the Mexican peso, the region’s laggard, has strengthened 1.3%. The dollar index, meanwhile, is up less than 0.2%.

Commodity prices may be the biggest catalyst for additional gains.

As rates soar across the developed world, China has stepped up efforts to boost its faltering economy with the first interest rate cut since April 2020. Optimism about the world’s second-largest economy, coupled with tensions between Russia and Ukraine , have skyrocketed energy prices, boosting coins linked to raw materials.

The Bloomberg commodity index, which is measured in dollars, rose more than 8.7% in January, the biggest gain for that month since 1980, with iron ore spot prices rising more than 16%. . This month, the index has added another 3.5% rise, thanks to a 5% rally in copper.

Commodity futures are pricing in scarcity as markets appear to be “running out of it,” Jeff Currie, head of commodities research at Goldman Sachs Global, said on Bloomberg TV.

chasing the winners

Investors are especially inclined to coins from Brazil Y chilithe top two gainers this year among the 31 developed and emerging markets it tracks Bloomberg.

In Latin America’s biggest economy, foreigners and locals alike have embraced the possibility of the return to power of Luiz Inácio Lula Da Silva, the leftist former president who has had a rocky relationship with markets. Two of the country’s most renowned hedge fund managers believe that the markets take Lula’s return for granted.

Derivatives show that foreigners have become the most bullish on the real in almost four years, while non-resident investors bought 32.5 billion reais in local stocks in January.

Brazil “It is our first option for the region both in fixed income and in equities” Y “a still undervalued BRL should support asset prices”, strategists Kathryn Rooney Vera and Gregan Anderson of Bulltick LLC in Florida wrote last week. Citigroup also recommended matching long currency positions in chili, Brazil and Uruguay with a “small short position in the Colombian peso” in its model emerging markets portfolio.

JPMorgan last week added a bullish trade in the Chilean peso to its model portfolio allocations, leaving it with overweight currency positions in chiliPeru and Uruguay, and underweight in Colombia and Mexico.

“We believe that in the short term the alpha will be in currencies”JPMorgan’s Siddiqui and Brant wrote in a Feb. 10 note. “The moment, as well as the selection of countries and assets, remain fundamental”.