Analysis: Latin American currencies, favorable balance against the dollar, but with caution

RIO DE JANEIRO, BRAZIL – The rise in commodity prices and the international situation had favored the appreciation of currencies in Latin America in 2022, a region where the wind is blowing in favor of the dollar, managing to reverse the trend of the previous year, when the currencies of Argentina, Chile, Colombia, and Peru were among the most depreciated against the greenback.

Last year, the Argentine peso was the second most devalued globally (20.5%), followed by the Chilean peso (18.7%), the Colombian peso (17%), and the Peruvian sol (11.9%).

However, Latin American currencies are regaining momentum in the first quarter of 2022, supported by rising commodity prices, interest rates, and monetary policy behavior.

This is attracting new investors looking for safe investment opportunities, while the Ukraine conflict and even more the hybrid warfare of the West and NATO against Russia darkens Europe but brightens Latin America.

“There is still plenty of global liquidity” looking for a place to invest. The region “remains an attractive focus,” Alejandro Reyes, chief economist at BBVA Research Colombia, told Efe.

However, experts believe Latin American currencies are volatile and may depreciate again.

THE REAL, WITH A POSITIVE TREND

The Brazilian real was the world’s currency that appreciated the most against the dollar last March, by 7.69%, behind the Russian ruble, according to a report by the financial information platform of the consulting firm Economatica obtained by Efe.

So far this year, the dollar has fallen 16% and is sold at a trading rate below five reais.

This rebound is due to the high key interest rate (currently 11.75% p.a.), the rise in iron and crude oil prices, the withdrawal of investor funds from Russia, and the influx of foreign capital.

Although economists are cautious ahead of the October presidential election, they stress that the Brazilian foreign exchange market should continue to show a positive trend.

“Monetary control started much earlier in Brazil than in other parts of the world. Interest rates rose faster than in other countries,” said Flavio Serrano, chief economist at investment agency Greenbay.

THE PERUVIAN PESO BENEFITS

The Peruvian dollar’s exchange rate was at 3.63 soles in early April, the best since April 16, 2021, when it had the same value.

After the dollar surpassed 4 soles following the election of Pedro Castillo, the national currency registered an increase of 2.74% in the last 12 months and an increase of 8.68% in the cumulative change of 2022, according to official figures from the Central Bank of Peru (BCRP).

To date, the BCRP has made spot sales of $371 million at the trading desks and auctioned exchange rate instruments (exchange rate swaps and BCRP Resettable Deposit Certificates) for amounts less than the maturities. As a result, the balance of these operations decreased by US$498 million.

Although political instability could threaten the country given the recent protests and Castillo’s situation.

THE CHILEAN CURRENCY STRENGTHENS

The Chilean peso is also gaining value, partly due to high copper prices, in which the country is a world leader, and the high national interest rate, which the central bank recently raised from 5.5% to 7%, according to experts.

Chilean interest rates are well above average. This “attracts capital flows that seek a higher return than in the United States and Europe,” said Francisco Castañeda of the University of Santiago de Chile.

The dollar reached its all-time high in Chile last December 20, the day after leftist Gabriel Boric won the election, when it hit 876 Chilean pesos, but it has been falling steadily, moving further away from the 800-peso mark every day.

THE APPRECIATION OF THE COLOMBIAN PESO

Since last March, the dollar’s value in Colombia has been falling. On April 4, it reached its lowest value in the previous six months, at 3,706 pesos per dollar, and so far this year, the Colombian peso has appreciated by 6.89%.

The “big trigger” for the Colombian peso’s recovery was the rise in commodity prices, which “started even before the conflict between Russia and Ukraine, as demand recovered quickly after the shock of the economic crisis,” Reyes said.

Since oil and coal are Colombia’s main exports, the country will “have more dollars in the economy” due to the rise in prices of these two commodities, Scotiabank Colpatria’s economic team said in its weekly analysis.

However, Reyes predicted this trend would continue in the short term, as presidential elections will be held on May 29, with the possibility of a second round on June 19, depending on the candidates’ proposals.

THE MEXICAN PESO GAINS SIGNIFICANTLY

The Mexican peso ranks fifth in appreciation against the dollar, behind the Brazilian real, Peruvian sol, Chilean peso and Colombian peso, Gabriela Siller, director of economic analysis at Banco Base, told Efe.

This reflects the significant increase in the year’s first quarter, as it closed with an appreciation of 3.21%, or 65.9 cents, to trade at around 19.87 pesos per dollar.

Mexico “has received a lot of foreign exchange from exports and remittances,” Siller explained, due to the “free-floating” exchange rate system that depends on the interplay of supply and demand.

The analyst stressed that exports are expected to increase 7% to 10% this year, driven by growth in the United States, while remittances could show growth of 10% to 13%.

COMMODITIES, KEY FOR URUGUAY

The Uruguayan peso appreciated 7.24% against the dollar in the first quarter of 2022, from 45.90 to 42.40 pesos, due to the rise in commodity prices and inflationary pressures, Jorge Xavier, dean of the Faculty of Economics and Administration at the University of the Republic, told Efe.

The dollar has “suffered a very sharp decline in a very short period of time,” he added, explaining that it is commodity markets where Uruguay turns over much of its export balances.

On the other hand, when asked if the exchange rate differential between the Uruguayan peso and the dollar could influence this situation due to its impact on investment decisions, the central bank said that it does not seem to be a decisive factor at the moment.

“EXCHANGE RATE PEACE” IN ARGENTINA

There are two scenarios in Argentina. On the one hand, the peso has accelerated its depreciation against the dollar in the official foreign exchange market, in line with the strategy agreed with the International Monetary Fund, and on the other hand, the price of the U.S. currency has fallen in the alternative markets.

The price of the dollar in the official wholesale market, a market in which the Central Bank intervenes, closed the third month of the year at 111.01 pesos per unit, recording an increase of 3.31% in March and 8.07% in the first quarter of the year.

Meanwhile, the value of U.S. currency sold to the public in banks and exchange offices – where stores have a monthly quota of US$200 per person and are taxed at a rate of 30% – was 116 pesos per unit at the end of March.

According to the analysts interviewed, some “exchange rate peace” can be expected in the coming months, given the greater inflow of dollars from the liquidation of grain crop exports and the maintenance of the pace of depreciation of the official exchange rate in March, which would help narrow the gap with alternative exchange rates.

With information from EFE