Foreign investors are betting the worst rout in Latin American currencies since 2008 will extend into next year as commodity export prices slump and rising U.S. bond yields lure money out of the region.
The Bloomberg JPMorgan Latin America Currency Index of the region’s six most-traded currencies fell 9.6% this year and touched 94.49 today, within 1% of a four-year low. International investors boosted wagers to a record $21.5 billion this week that Brazil’s real will keep falling, data compiled by BM&FBovespa SA show. Analysts surveyed by Bloomberg only forecast Mexico’s peso will avoid further losses in the region next year.
All of Latin America’s most-traded currencies fell in 2013 as commodities posted their first annual decline in five years and the Federal Reserve’s push to unwind monetary stimulus sent benchmark 10-year U.S. Treasury yields to a two-year high. Economic growth will slow in Argentina and Chile next year while the recovery in Brazil falters, according to economists surveyed by Bloomberg.
“There’s a paradigm shift -- rising rates and negative export growth at a time when the commodity cycle has ended,” Gustavo Arteta, a currency strategist at UBS AG in Stamford, Connecticut, said in a telephone interview Dec. 23. “The region’s countries have been exposed and have to adjust to confront the changes.”
Latin America’s economies are expanding at the slowest pace in four years as a decade-long commodities boom moderates.
Commodity prices have fallen 1% this year, the first decline since 2008, as an economic slowdown in China cut into demand, according to the Standard & Poor’s GSCI Index. Average growth for countries in the region will be 2.88% in 2014, according to the median forecast of analysts surveyed by Bloomberg. While that’s up from 2.38% in 2013, it’s still less than half the 6.4% rate in 2010.
Signs of improvement in the U.S. economy led the Fed to scale back its purchase of Treasuries that held down yields and helped fuel a credit boom in emerging markets. The Fed’s move will make it harder for Brazil, Chile and Peru to attract capital to finance current-account deficits, according to Arteta. Brazil’s gap in the broadest measure of trade in goods and services widened to 3.7% of gross domestic product in October, the highest since 2002.
“We can sum up this year’s performance in stronger growth in the U.S. and weaker growth in emerging markets,” Eugenio Cortes, the head of currency forwards at EuroAmerica Corredores de Bolsa SA in Santiago, said in a telephone interview Dec. 23. “The long-term trend is for emerging-market currencies to continue weakening, maybe at a slower rate.”
Brazil’s real has lost 13% this year, extending its decline since the end of 2010 to 29%. The Chilean peso dropped to a two-year low on Dec. 3 and is down 8.5% this year. Mexico’s peso has declined the least, falling 2%, while the Colombian peso and Peruvian sol dropped more than 8%. Argentina’s peso, managed by the central bank through regular foreign-exchange market interventions, tumbled 24%, the most since 2002.
Foreign investors amassed $21.5 billion in short real positions on Dec. 23, according to information compiled by Bloomberg based on futures contract trading on BM&FBovespa. The short wagers are the highest since Bloomberg began compiling the data in 2005.