The desk views the current trajectory of Latin American currencies, notably the Mexican peso and Brazilian real, as fragile against a backdrop of mixed economic signals and central bank policy shifts. Per the full note from ing-think, concerns arise particularly regarding Banxico's dovish stance, which diverges sharply from global hawkish trends, putting the peso at risk of further depreciation. Market dynamics suggest that while BRL may see recovery supported by local fiscal policies under President Lula, the peso’s vulnerability remains pronounced due to a narrowing Fed-Banxico policy spread. Institutional consensus on the EUR/USD angle also reflects broader apprehensions in the FX market.
What the desk is arguing
The desk contends that Banxico's recent dovish tilt poses substantial threats to the Mexican peso's stability. The risk of further dollar strength, stemming from the Fed’s policy, adds to these concerns, as indicated by the Fed-Banxico policy spread being notably narrow. According to ing-think, Banxico’s recent rate cuts amid weak domestic pricing power underscore this precarious situation.
Supporting this view, the desk identifies the Brazilian real as potentially more resilient, particularly in light of Lula's focus on fiscal policy, suggesting that the BRL could recover towards recent highs. Notably, existing high rates (13.25%) in Brazil serve as a buffer against aggressive selling amid shifts in sentiment.
Where it sits in our coverage
The current strategy aligns with a wider consensus where the median targets for the EUR/USD remain around 1.1400 for December 2026, with ranges showing significant dispersion across institutional forecasts. Specifically, notable targets include investec at 1.1700, and bnpparibas at 1.1400. Given the variation, our position leans towards the upper bounds of these forecasts, reinforcing the notion of cautious optimism regarding the BRL.
How other firms see it
The consensus appears mixed, with firms like bofa and rbc expressing concern about the peso's weaknesses, particularly focusing on Mexican domestic factors that could hinder recovery. Conversely, firms that express a more bullish outlook on BRL include cibc and commerzbank, suggesting varied perspectives within the market regarding currency fundamentals and expected volatility.
For broader context, the recent behavior of USD/JPY, influenced by monetary policy adjustments from the BoJ, could serve as a relevant indicator to observe given its correlation with global risk sentiment affecting Latam currencies. The interplay between global capital flows and local monetary policies remains a critical focus for traders navigating these complex landscapes.
01Banxico's dovish stance is raising concerns for the peso, potentially making it vulnerable in a strong dollar environment.
02The Brazilian real may show resilience due to higher yields and fiscal policy support under President Lula.
03Consensus targets for major currency pairs like EUR/USD suggest broader market caution about currency volatility.
04Expectations of currency performance diverge significantly across firms, indicating a mixed landscape for trading strategies.
Market implications
Watch for developments in the Fed's policy signals, particularly in relation to Banxico’s monetary stance, which could shift positioning dynamics in the peso. A key level to monitor will be the USD/MXN range, especially if it approaches recent highs amid heightened dollar demand.
Risks to this view
A shift in Banxico’s policy direction towards more aggressive tightening could quickly reverse current bearish sentiment towards the peso. Additionally, any abrupt changes in U.S. monetary policy or global economic shocks could further complicate market conditions for Latam currencies.
Articles Latam FX Outlook 2027: Banxico abandons the peso Published 18:03 FX Translate Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download It has been a mixed year for Latam FX, where only the higher yields of the Brazilian real and Mexican peso have allowed those currencies to deliver a net total positive return against the dollar. In 2027, we think the real can outperform the forwards, but are worried about Banxico’s neglect of the peso. Chile’s peso might prove a little more resilient, too Chris Turner and Ewa Manthey Executive summary Latin currencies are going into year-end on the back foot.
A strong dollar clearly is not helping, but it's really the local stories which have weighed on the Brazilian real and the Mexican peso. In Brazil’s case, President Luiz Inácio Lula da Silva's surprise win and fiscal promises are the key story. In Mexico, it is the surprisingly dovish Banxico, which is bucking the trend of the hawkish shift worldwide.
Over the coming months, we look for the real to find some more support. President Lula understands that fiscal policy is under the microscope, and we doubt he needs to push ahead with looser fiscal policy right now. His appointment of Finance Minister, alongside plans for fiscal policy and the 2027 budget, will give us a good steer over the coming months.
And while the local central bank may be in no hurry to hike, its already high policy rate of 13.25% means the real is an expensive sell. We look for a real recovery over the coming quarters. We are more worried about Mexico’s peso.
Banxico cut rates as recently as November and believes that domestic pricing power is so weak that the risk of producers passing on higher costs is minimal. The Fed-Banxico policy spread has never been this narrow and leaves the peso vulnerable to further dollar strength or any global shocks. We therefore forecast BRL/MXN recovering to the 3.55/60 area by the first quarter.
We see far less drama in Chile’s peso next year, where supportive metal prices and some fiscal reforms can see some modest gains in the CLP through the year. Banxico slashes the peso's rate protection Source: ING, Refinitiv "> Source: ING, Refinitiv Focus on Latam commodities Copper (Chile, Peru, Brazil) Supply constraints should continue to support copper, with declining ore grades and operational disruptions limiting mine supply growth. Longer term, grid expansion, electrification and data centre investment remain powerful structural demand drivers.
However, higher price levels could eventually test consumer appetite, particularly in China, although physical demand remains supportive for now. Trade policy adds another layer of uncertainty. US stockpiling has pulled metal towards the COMEX market, tightening availability elsewhere, although this support could fade if tariff concerns ease.
While supply constraints should provide a floor under prices, we are cautious on the outlook from current levels. High prices risk weighing on demand, while softer Chinese consumption or an easing of US tariff concerns could leave copper vulnerable to a correction. We expect copper to average around $13,370/t in 2026 and $13,550/t in 2027, suggesting prices remain elevated but broadly rangebound over the coming year.
Iron ore (Brazil, Peru, Chile) The outlook for iron ore remains challenging, with pressure building on both sides of the market. In China, the prolonged property downturn continues to weigh on steel demand, while the gradual shift towards scrap-based steelmaking should also reduce the economy’s reliance on iron ore over time. Further policy support could provide some relief, but is unlikely to fully offset weaker demand from the traditional drivers of steel consumption.
Meanwhile, seaborne supply is set to increase, with the ramping up of Guinea’s Simandou project adding a significant new source of high-grade ore and contributing to a progressively looser iron ore market. With additional supply entering a market already facing structurally weaker Chinese demand, we expect the iron ore market to become increasingly well supplied, putting further downward pressure on prices. We expect iron ore to average around $98/t in 2026 before falling to $95/t in 2027, with prices easing towards $90-91/t by the second half of 2027.
Gold (Peru, Chile) We remain constructive on gold, although the near-term path is likely to be volatile. Central bank buying remains an important pillar of support as reserve managers continue to diversify, while geopolitical uncertainty should maintain demand for gold as a safe haven. Investor flows will also remain important, although exchange-traded fund (ETF) demand can reverse quickly when rate expectations turn more hawkish or the dollar strengthens.
With US monetary policy likely to remain relatively restrictive, interest rates could limit the pace of further gains. Gold is also vulnerable during broader market sell-offs, when investors may liquidate profitable positions to cover losses or meet margin calls elsewhere. However, we believe central bank buying and continued diversification will keep gold well supported, with pullbacks likely to attract renewed investor demand.
We expect gold to average around $4,408/oz in 2026 and $4,375/oz in 2027, with prices rising through 2027 and reaching around $4,550/oz in the fourth quarter. Soybeans (Brazil) Global soybean stocks are expected to end the 2026/27 season at comfortable levels close to 124m tonnes, which is only marginally lower than the previous season. The soybean balance remains comfortable, with the US expected to produce a record harvest this season on the back of larger acreage as well as strong yields.
Meanwhile, the other key producer, Brazil, is also expected to yield a record crop this season. However, with Brazil there is a bit more uncertainty due to El Niño, which can bring drier weather to northern Brazil and excessive rainfall to southern Brazil. This could, in turn, disrupt field operations.
Comfortable supply and demand dynamics suggest that soybean prices should be capped. Our view that oil prices will move lower through 2027 should also remove some support for the soybean market through soybean oil. We expect CBOT soybeans to average $11.80/bu in 2027.
The upside risk centres around Brazilian supply and the potential impact from El Niño, while the key downside risk is any potential re-escalation on the trade front with China, which could impact Chinese purchases of US soybeans. From a Brazilian perspective, re-escalation between the US and China would only increase Chinese demand for Brazilian soybeans. Currency sections USD/BRL: Lula rides again Spot Year ahead bias 4Q26 1Q27 2Q27 3Q27 4Q27 USD/BRL 5.57 Bearish 5.35 5.25 5.00 5.00 5.00 Lula enjoys an unexpected fourth term: In a major surprise, incumbent President Luiz Inácio Lula da Silva defeated Flávio Bolsonaro in a run-off to win another four-year term – Lula’s fourth.
Brazil’s real saw a huge 12% sell-off on the outcome on the assumption that Bolsonaro’s policy mandate of fiscal reform and deregulation would never see the light of day. Financial markets are now waiting to see who Lula picks to be in his government. Very much in focus will be the Finance Ministry, where Geraldo Alckmin and Rafael Fonteles have been linked to the top job of Finance Minister.
Alckmin might be preferred by the markets given that he is a known quantity. Limiting the fiscal fallout in Brazil, however, remains the independent central bank. Central bank governor Gabriel Galípolo’s term ends in December 2028.
Markets now rule out any chance of easier monetary policy and look for rates to be hiked 125bp to 15.00% by the end of 2027. Energy story is positive for Brazil: Huge uncertainty about the future path of energy prices is slightly less of a concern for Brazil. The country is an oil exporter and impressively generates more than 80% of its electricity from renewables.
Brazil’s leadership in hydroelectric power is now being complemented by strong growth in solar and wind. That ability to produce cheap electricity through renewables is now attracting the attention of large US data centre providers. President Lula has also tried to alter tax structures to make these inward investments more attractive.
A few years ago, foreign direct investment (FDI) inflows into Mexico on the back of nearshoring were a hot market topic. FDI into Brazil on the US data centre story – even if only to support Brazil’s huge domestic market – would be welcome news for the real. Can Brazil survive a debt sell-off?
Consensus expects around 2% GDP growth for Brazil next year, with CPI stabilising in the 4.0-4.5% area. This would still be above the 3% inflation target. The fiscal side remains Brazil’s Achilles’ heel, where a net budget deficit of around 8% of GDP and gross government debt close to 100% of GDP leave Brazil vulnerable if external conditions deteriorate further.
The slight saving grace for Brazil is that deep local markets mean that only around 4% of government debt is FX-linked and that Brazil has relatively large FX reserves covering around 10 months of imports. We think the central bank has the tools to manage any more extreme pressure on the real. Assuming the new government maintains fiscal discipline, continued high carry and some energy advantages can see USD/BRL break below 5.00 next spring.
USD/MXN: Banxico happy with a weaker peso Spot Year ahead bias 4Q26 1Q27 2Q27 3Q27 4Q27 USD/MXN 18.61 Mildly Bearish 19.00 18.75 18.50 18.25 18.00 Banxico focuses on its negative output gap: Having been the second-best-performing EM currency in the year to August, things fell apart for the peso in September. The 10% USD/MXN rally that month was entirely down to Banxico. Having cut the policy rate spread with the US to a record low of 275bp earlier in the year, Banxico’s decision not to follow the Fed’s hike in September left the peso sorely exposed.
A Banxico cut to 6.25% in November has not helped. Banxico has gone out of its way to highlight the slack in the domestic economy and how it will not mechanically follow Fed policy into tighter territory. The International Monetary Fund (IMF) agrees with Banxico’s view of domestic economic slack and forecasts a negative output gap of 0.4% of GDP in 2027.
Banxico looks unlikely to follow the Fed with an expected rate hike in December and plans to keep rates on hold at 6.25% for a good while. Trade uncertainty doesn’t help: The decision made by the US to review the terms of the United States-Mexico-Canada Agreement (USMCA) annually rather than every six years has introduced uncertainty into Mexico’s investment proposition. What US President Donald Trump plans to do with trade in his final two years in office remains to be seen.
But the fear will be that he wants to tighten the screws on the rules of origin in key sectors such as autos and minimise China’s use of Mexico as a back door into the US market. Having been a major beneficiary of nearshoring trends since 2020, concerns are rising that new investment is slowing. While inward investment into Mexico in the first half of 2026 was strong, the breakdown shows that nearly 90% of it was retained earnings rather than new investment.
There are also concerns that a real-term decline in remittance flows into Mexico from the US is weighing on domestic demand. By some estimates, remittance flows have fallen 20% in 18 months. Lower carry, higher volatility to hold peso back: It seems clear that Banxico is less concerned about inflation than many central banks.
And the policy rate spread at 225bp could keep the peso on the soft side. Consensus looks too conservative on peso weakness over the next three to six months. Interestingly, Mexican local bond yields have shown some of the highest EM correlations with US Treasury yields this year.
A further rise in energy prices and a US bond market sell-off, presumably accompanied by increased volatility, would spell trouble for the peso. This is especially the case since Banxico has been touting the peso’s strong carry-to-volatility credentials. Yet foreign ownership of Mexico’s local bond market is a paltry 11% and way below the 30% level seen before the pandemic.
And barring a US financial crisis, which would see EM currencies crater around the world, we suspect there will be good buyers of the peso above 19 in USD/MXN. USD/CLP: Kast revs up the economy Spot Year ahead bias 4Q26 1Q27 2Q27 3Q27 4Q27 USD/CLP 985.00 Bearish 1000.00 1000.00 975.00 950.00 925.00 Chile’s pro-investment tax reform: Having suffered another year of sub-trend growth in 2026 (0.7%), expectations are that Chile will bounce back next year. Part of that optimism is based on the recently passed National Reconstruction Act, which combines modest government spending to address previous wildfire damage with a major, pro-business tax reform.
Here, the corporate tax is set to be cut from the current 27% to 23% by 2029, while capital gains tax and other business rates will be made less onerous. The plan is to provide a stable and attractive environment for business investment over the coming years. President Kast’s success in getting this bill through parliament and the fact that the next election is not until 2029 are pluses.
Consensus expects growth to bounce back to 2.8% next year, with some looking for 3% or more. Stronger domestic demand has the normally dovish central bank sounding more hawkish. The market prices 50bp of rate hikes to 5.00% next year.
Authorities are peso buyers and sellers: In a slightly strange set-up, Chilean authorities are both buyers and sellers of USD/CLP. The central bank is buying USD/CLP, having announced in 2025 that it would buy $25m per day, targeting $18bn of purchases by 2028 to build FX reserves and pay down a foreign currency credit line. The Finance Ministry is selling USD/CLP, going into the market to sell Eurobond proceeds and buy pesos.
This year, it has sold close to $5bn worth of euros, dollars and, most recently, Swiss francs. All this activity is regularly reviewed and should USD/CLP sustain a break above 1,000 in the near term, we suspect the central bank would scale back its FX buying. These amounts are relatively small compared with the $24bn of daily turnover in the peso (2025 BIS data) but can be influential in thin markets.
Oil and weak copper production pose challenges: Like other currencies, Chile’s peso has suffered from higher energy prices, higher US rates and a stronger dollar. Any further rise in energy prices could undermine Chile’s position as a net fuel importer, with fossil fuels still comprising around two-thirds of the country’s energy demand. While high copper prices should be offsetting some of those higher energy costs, Chile has struggled here too.
Copper exports are down around 15% year-on-year due to a variety of factors, and an investigation into mines overreporting copper exports is not helping matters either. We look for USD/CLP to trade around the 1,000 area over the coming months, but if energy prices avoid going too much higher and US rates can edge a little lower, Chile’s better domestic demand story can drive some healthy peso gains in 2027. FX Outlook 2027 Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives.
The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Authors Chris Turner Global Head of Markets and Regional Head of Research for UK & CEE Chris is Global Head of Markets and Regional Head of Research for UK & CEE. Together with his team, he provides short and medium-term FX recommendations for ING's corporate and… Ewa Manthey Commodities Strategist Ewa Manthey is a Commodities Strategist based in London.
She joined the bank in September 2022 and covers the entire commodities complex, with a particular focus on the metals markets. She has… In this article Executive summary Focus on Latam commodities Currency sections
Euro finds temporary support near 1.1066 against US Dollar, outlook remains uncertain