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BBVA See Scope For Further Resilience In Latam High-Beta FX

LATAM FX
  • Despite the generalised dollar strength seen YTD, BBVA note the relative resilience of most Latam currencies through this period, supported by still-high carry in parts of the region. In particular, they note that BRL, COP and particularly MXN have seen only mild weakness against the dollar over this period, while low yielders such as CLP and PEN have fared less well. Weaker commodity prices, especially copper, may also have undermined the latter, lower yielders.
  • US CPI remains a key risk this week, but BBVA believe that it would take a significant upside surprise to reignite dollar demand. As such, they see scope for further outperformance by the high yielders, although they would fade USDBRL at 4.85, USDMXN at 16.85 and USDCOP at 3865.
  • The weakness of CLP following recent large rate cuts put the focus on this week’s BCCh minutes. However, BBVA believe that the BCCh is now less sensitive to FX weakness, which in their view suggests that it would take a faster break above 1000 or higher to prompt policy action, starting with new FX swaps. As such, they believe that CLP will remain a funding currency this year.
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