Latam FX Talking: A few clouds on the horizon
The desk highlights emerging concerns in Latin American FX stability, particularly focusing on Brazil and Mexico. Per the full note, while Brazil's high yields and robust energy export position provide some support for the BRL, the recent uptick in political risks and aggressive interest rate pricing could temper its performance. Any potential slowdown in GDP growth or unfavorable global economic conditions may present challenges for both currencies, especially with risk sentiment wavering. Concerns regarding Mexico's growth outlook amid ongoing trade renegotiations add further complexity to the picture.
What the desk is arguing
The desk underscores that despite Latin America being perceived as stable thus far, factors such as political changes in Brazil and trade negotiations in Mexico could introduce volatility. Per the source commentary, the Brazilian real (BRL) has seen recent underperformance tied to local interest rate adjustments, with markets pricing in approximately 125 basis points of tightening over the year ahead.
Looking closely at Brazil's economic indicators, the recent 1.1% quarter-on-quarter GDP growth for Q1 raised concerns about potential overheating, which, combined with President Lula's growing political influence, has contributed to the cautious sentiment surrounding the BRL. However, with 13% implied yields, selling the BRL may not be attractive at this juncture, particularly as high crop yields and strong demand for energy exports could provide a buffer.
Where it sits in our coverage
While our internal coverage lacks specific consensus targets for USD/BRL or USD/MXN, broader market narratives suggest that several institutions are taking varied positions on both currencies based on their outlooks for growth and central bank policies. Notably, firms like jpmorgan and bofa hold differing views on Mexican peso stability and BRL performance going forward.
How other firms see it
Among aligned institutions, firms are generally taking a cautiously optimistic stance on Brazil’s potential as an energy exporter while recognizing risks, particularly related to political dynamics. Contrarily, firms like bofa express caution, particularly regarding the peso’s rate of recovery post recent corrections.
Key indicators to watch include trade balances and upcoming central bank statements which are likely to influence investor sentiment across Latin American currencies, especially USD/BRL and USD/MXN movements.
Key takeaways
- 01Brazil's high yield is supportive for BRL despite political risks.
- 02Mexico's outlook remains clouded amid trade negotiations.
- 03Interest rate expectations are aggressive for Brazil, caution is warranted.
- 04Emerging market sentiment may fluctuate impacting both BRL and MXN.
Market implications
Traders should monitor the BRL closely as it approaches significant support levels, particularly with yields near 13%. Should interest rate expectations temper, any sell-off may accelerate. Observing upcoming trade balances and economic projections will be crucial in determining the trajectory for the MXN and BRL, especially given current volatility.
Risks to this view
Key risks that could invalidate this call include surprising changes in energy prices that negatively impact Brazil's trade balance or a political shift that undermines investor confidence. Additionally, any global risk-off sentiment could disproportionately impact both currencies, leading to significant capital outflows.
Articles Latam FX Talking: A few clouds on the horizon 08:16 FX Talking Brazil Mexico Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Latin America has been viewed as a bastion of FX stability so far this year. Yet a few wrinkles are emerging – from politics in Brazil to a trade re-negotiation in Mexico to the outlook for Chile’s copper industry. Even so, Brazil's status as a high-yielding energy exporter should protect the real, and we remain bullish here Chris Turner The outlook for the copper industry in Chile adds a wrinkle to Latin America’s FX stability USD/BRL: A little underperformance comes through Spot One month bias 1M 3M 6M 12M USD/BRL 5.10 Neutral 5.15 5.15 5.00 4.75 We’ve started to see some underperformance in the real over the last five to 10 days, driven mostly by local interest rates.
Markets are now pricing roughly 125bp of tightening over the next year, which looks too aggressive to us. Fears of economic overheating — stoked by Brazil’s strong 1.1% quarter-on-quarter GDP print in 1Q and the Lula administration’s loose fiscal stance — helped drive the recent rates‑led sell‑off. Additionally, Lula pulling ahead in presidential polling seems to have weighed on BRL.
But with 13% implied yields, the BRL remains an expensive sell. And ultimately, high yields, Brazil’s energy exporter status and perhaps high crop yields on El Niño should keep BRL supported. Source: Refinitiv, ING forecasts "> Source: Refinitiv, ING forecasts USD/MXN: MXN interest rate protection is a little lean Spot One month bias 1M 3M 6M 12M USD/MXN 17.21 Mildly Bullish 17.50 17.50 17.25 17.25 The peso has been performing relatively well during this corrective period in risk assets.
A 2.5% correction is not a bad outcome for a high-beta EM currency. The next couple of months could be a difficult period for EM assets; we see potential MXN weakness. And after a two-year, 475bp Banxico easing cycle, the Mexican policy spread over the US is now a lean 275bp.
This is close to the lows over the last decade. The USMCA re-negotiation looks set to drag on, with the US pushing for stricter rules of origin. This uncertainty can weigh on the market.
We don’t think Banxico wants USD/MXN to trade too far under 17.00, which in any case looks unlikely this summer. Source: Refinitiv, ING forecasts "> Source: Refinitiv, ING forecasts USD/CLP: Copper story could prove problematical Spot One month bias 1M 3M 6M 12M USD/CLP 905.03 Mildly Bullish 925.00 925.00 925.00 900.00 Higher US rates have pushed USD/CLP toward the top of its broad 850–950 range. Another sharp rise in energy prices in the coming months would be particularly unwelcome for Chile.
We’re a little worried about Chile’s copper production later this year, where more limited access to sulphuric acid, linked to Middle East–related supply disruptions, could hit activity. We’re also waiting to hear about US tariffs on refined copper products – a decision is due by the end of June. A delay or a tariff could keep copper prices bid, while no tariffs could see copper prices give back some of their recent gains.
Expect USD/CLP to continue trading in an 850-950 range, with a top-side bias given the current strengthening dollar story. 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 Author 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…
Sources & References
How we cover this story