Latin America’s rout seen extending into next year

Chile Forwards

In Chile, overseas investors in the peso forwards market raised their net short position by $5.7 billion to $11.9 billion since the central bank started lowering borrowing costs Oct. 17. The wagers reached $12.7 billion on Dec. 12, the most in four months, according to data compiled by the central bank.

Central banks in Chile, Colombia, Mexico and Peru cut borrowing costs to counter the economic slowdown, pushing the region’s average benchmark lending rate to 6.82%, the lowest level since at least 2000.

The U.S. recovery, while leading to higher Treasury yields, may help bolster some currencies, including the Mexican peso, by fueling a pickup in demand for exports from developing nations, according to Sebastian Brown, an economist and currency strategist at Barclays Plc.

Mexico, which sends about 80% of its exports to its northern neighbor, is also poised to receive more foreign direct investment after President Enrique Pena Nieto pushed through a constitutional reform this month to open the oil industry to private drilling for the first time in 75 years.

Mexico Prospects

“For the Mexican peso, our scenario is positive partly because of the country’s proximity to the U.S., and the recovery there will have a positive effect on the currency,” Brown said in a phone interview from New York on Dec. 23. “The energy reform will have an important effect in increasing Mexico’s attractiveness for foreign investors, and the currency has some space to strengthen versus the dollar.”

The median forecast of analysts surveyed by Bloomberg is for the peso to rise 3.7% next year. That compares with projected declines of at least 0.1% for the other major Latin American currencies. The real is expected to fall 0.8%, while the Chilean peso will decline 1.7%, the surveys show.

The real has gained 3.7% since Aug. 22, when Brazil announced a $60 billion intervention that included the auction of $500 million of currency swaps four days a week to bolster the currency and limit import price increases. The central bank said Dec. 18 that it will reduce the offerings to $200 million of swaps each trading day from January through at least June.

Sol Intervention

In Peru, the central bank has sold $5.2 billion since July to shore up the sol. Colombia has taken a different tack, trying to weaken the peso and boost foreign reserves by purchasing more than $15 billion over the past three years.

Brazil’s economic slump helped fuel foreign-currency outflows from trade and investment this year of $7.7 billion through Dec. 13, compared with inflows of $17 billion in 2012 and $65 billion in 2011, according to data from the central bank. The economy will grow 2.3% in 2014, matching this year’s expansion, according to a Bloomberg survey of analysts. That rate is down from 7.6% in 2010.

“Brazil seems less and less attractive for foreign investors because of its slow growth,” Vladimir Caramaschi, the chief strategist at Credit Agricole Brasil in Sao Paulo, said in a telephone interview Dec. 20. He predicts a 5.7% decline in the currency next year. “With a lower cash flow into the country, the real should depreciate further.”

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