Conclusion: Recent action(s) and expectations regarding both money (currencies) and monetary policy are creating intra-regional divergences across Latin American financial markets.


Prices Rule

In contrast to Asian stocks, Latin American equity markets finished higher last week, closing up +0.8% wk/wk on a median basis. A solid degree of intra-regional disparity is noteworthy (Argentina, Chile, Venezuela all up over +3%; Brazil and Mexico up less than +1%). Latin American currencies all declined against the USD wk/wk, closing down -1.4% on a median basis. The Mexican peso (MXN), a currency we’ve been negative on for several months, led the way to the downside (-3.2% wk/wk).

Like equities, Latin American sovereign debt markets were mixed as well, highlighted by Brazil’s -10bps wk/wk decline and Colombia’s +21bps wk/wk gain on the short-end of the maturity curve (2yrs). From a credit risk perspective, Latin American 5yr sovereign CDS broadly widened last week, closing up +4.7% on a median basis. Percentage gains were led by Colombia (up +11bps or +7.2% wk/wk).

Looking at 1yr on-shore interest rate swaps, marginal shifts in interest rate expectations were mixed throughout the region (Brazil -8bps wk/wk; Mexico +8bps wk/wk).

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The Least You Need to Know


  • In case you missed it, Brazil’s central bank lowered its benchmark SELIC interest rate last week by another -50bps. This marks the second-straight cut and was in-line with their commentary, consensus expectations, and our outlook for both Brazilian inflation and growth to trend lower from current levels over the intermediate term. Still, with CPI at a six-year high, the central bank continues to receive heat from the more-hawkish members of the Brazilian populace. Refer to our 10/20 note titled, Brazil: A Case Study in Sticky Stagflation for more in-depth analysis.


  • As of the latest reporting period (10/10), foreign investors increased their holdings of fixed-rate peso bonds to a near record high of 674.6 billion pesos ($50.2B) or 39.8% of the total amount outstanding. As we’ve penned in the past, lax capital controls and high foreign investor participation in Mexico’s capital markets will remain a headwind to the Mexican peso over the intermediate-term TREND – particularly if our views regarding Europe’s Sovereign Debt Dichotomy are realized. Easy inflows make for easy outflows when the tide reverses. The peso, is down -13.1% vs. the USD over the last three months – good for fifth-worst among all currencies globally.


  • As of the latest count (40% of total votes) incumbent president Cristina Fernandez has garnered 53% of the votes in this weekend’s Argentine presidential election. This is not a surprise; she had been leading by a substantial margin in the polls leading up to Sunday’s vote and her policy of seizing state assets and central bank reserves to help increase social spending all but assured her of the popular vote. The passage of this catalyst now puts a potential currency devaluation in play – something we’ve been highlighting the risk of for a few months now. Declining central bank reserves (FX intervention), a rising cost of capital (30-day benchmark deposit rate at a 34-month high of 19.7%), and 12mo non-deliverable peso forwards (-17.9% discount to spot rate) are all suggesting the same thing. 

Darius Dale


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