Latin American currencies are in the ‘eye of the storm’ as currencies of Brazil, Mexico, and Chile could fall as much as 10 percent in the next few weeks amid tumbling commodity prices, growth concerns in China, renewed Fed fears, and a deterioration of domestic fundamentals, Societe Generale (SocGen) said in a bearish report published on Tuesday.
SocGen is advising investors to bet against Latin American (LATam) currencies in what it calls a “once-in-a-lifetime trade”:
“In the current environment LATam currencies are in the centre of the storm and short Latam FX is a once-in-a-lifetime trade at this juncture … almost all LATam countries face a rapidly deteriorating growth picture amid the drop in commodity prices.”
Emerging market currencies have been under severe pressure in recent days as the JP Morgan Emerging Markets FX Index has recently fallen to a new record low, and such currencies could accelerate their decline, SocGen warned.
The U.S. Federal Reserve (Fed) is set to release a statement on Wednesday in which it may hint at a interest rate hike increase in September. Higher rates could increase the appeal of U.S. dollar assets, spurring investors to sell other currencies.
SocGen warned that LATam currencies are highly vulnerable to any Fed rate hike due to their current account deficit positions and capital outflows.
Domestic turbulence in Latin America, in the case of Brazil, add to a “gloomy picture” which could lead to a further short-term fall of 10 percent for Chilean, Mexican, and Brazilian currencies, the report said.
The Brazilian real will trade at 3.60 in the third quarter and at the same level in the fourth quarter, the Mexican peso will trade at 17 and 16.25 over the same timeframe, and the Chilean peso will trade at 700 and 690 over the same timeframe, SocGen said. These estimates represent declines of at least 4.4 percent for each currency by the end of the third quarter.
Emerging market currencies have fallen over the past year by around 20 percent, led by over a 30 percent plunge in the Russian ruble, Colombia’s peso, and the Brazilian real, according to data by Bloomberg.