What a difference a mountain range makes. To the east of the Andes, Argentina is in the throes of an old fashioned, disorderly devaluation, in which authorities scramble to plug every leaking channel of hard currency flows until at last they are carried off in the flood. To the west, Chile’s authorities are looking on with calm equanimity as their currency gently subsides to its own level.
What is it, other than snow-capped peaks, that unites and separates their two worlds?
By Fernando Losada of AllianceBernstein
Since May, over a quarter of the past five months’ foreign portfolio investment into emerging markets has been withdrawn, according to the latest available data from EPFR. For the Latin American economies, this is likely to result in slower growth, but the impact may be milder this time around.
Latin American assets endured another day of selling on Thursday as investors took fright to yesterday’s news that the US Federal Reserve will start scaling back its massive bond buying programme this year.
Among stocks, Mexico’s IPC index closed down 3.9 per cent at 37,517.23 – a 12-month low. The peso, after a volatile day of trading, is down 0.7 per cent at 13.33 pesos to the dollar – its lowest level since last August. Chile’s IPSA index tumbled 3.1 per cent – its biggest one day drop in 20 months.
Brazil’s Bovespa – which came under heavy selling pressure on Wednesday – was offered some minor relief. It closed up 0.7 per cent at 48,214.43.
It’s been a bad few weeks for EM currencies. The South African rand and the Indian rupee have taken a particular hammering, helped along by violent mining-industry unrest in the former and apparent policy paralysis in the latter. The Turkish lira, too, has been badly shaken by the past fortnight of violent protest.
None of those currencies, though, would have fared quite as badly were it not for the fear that the Fed’s quantitative easing programme may be coming to an end. And nowhere is the undiluted end-of-QE effect clearer than in Latin America.
Oh the cruel irony. After lobbying for a weaker currency for the past three years, Brazil’s government would now give anything to strengthen the real, it seems.
The central bank sold a whopping $2.1bn of currency swaps on Monday to prop up the real against the dollar after it hit its weakest intraday level since May 2009.
What’s up with the Mexican peso? So far this month, the currency has weakened a little, and on Friday it was trading at 12.67 to the US dollar compared with 12.61 at the start of the month. Could it be that the rally since last year is petering out?
Trying to understand what Guido Mantega is up to can be exhausting, especially when it comes to his favourite topic: currency wars.
The real weakened early on Wednesday after Brazil’s finance minister warned the government was ready to correct any excessive moves in the exchange rate, adding that a weaker currency makes domestic industry more competitive.
If Wednesday’s dollar auction by Mexico’s central bank has anyone worried about whether it has finally followed in Brazil’s interventionist footsteps, they shouldn’t worry too much.
True, the auction took place as the peso slid against the dollar on fears stemming from Greece and Europe’s debt crisis was the first currency intervention since 2009. And it was the first time the bank used its dollar-auction mechanism since it was reintroduced towards the end of last year.
Here we go again. As beyondbrics readers know, LatAm currencies have had a blistering start to the year, with most of the region’s currencies hitting their highest levels in about four months against the dollar.
Yet barely six weeks into the rally and it would appear that the pace of FX appreciation has already gotten too hot for comfort for some central bankers.