The document discusses recent economic developments in Latin America. While the Mexican peso performed strongly in late 2016 and early 2017, appreciating against the dollar, underlying weaknesses remain across Latin America with economic growth prospects slashed for Mexico and Brazil. The peso rose over 1.8% on the day of Trump's inauguration despite expectations of threats to Mexico, though analysts say the currency will remain volatile. Brazil also faces economic pressure, with the central bank cutting interest rates further to stimulate a collapsing inflation rate and recession, while the IMF lowered growth forecasts and President Temer appears unable to take drastic action to improve the economy.

1. Latin America
The past six weeks have yielded mixed economic data for the economies of Latin America. Whilst
the real was the strongest Latam currency of 2016, the peso has performed strongly since
December. However substantial evidence continues to prove the underlying weakness in the
region, with growth prospects for both major economies in the region: Mexico and Brazil slashed.
President Trump and his campaign was largely seen as a threat to elusive (at best) growth in the
Latam region, and whilst it remains too early to explore the effect of Trump, starting January 20th
,
the peso has performed extremely well against other major currencies. The Mexican currency
rose by 180 bp against the dollar over the course of the day. Before Trump began his
inauguration, the peso came close to 22 against the dollar but jumped when Mr Trump spoke of
intended protectionist trade policies. The direct threats to Mexico that many traders had expected
against never came, and the result was the currency closing at 21.6, making it the best 24 hours
since 15th
November for the peso. According to Eduardo Suárez, co-head of Latam fixed income
at Scotiabank in Mexico, “it will be a super volatile year [for the peso] but the reality will be much
better than [Trump’s] rhetoric”. Ironically, alongside the gains in Mexico’s currency, Cemex (a
Mexican cement producer) shares reached an 8.5 year high at $18.92. Trump’s pledge for a wall
along the US-Mexico border made the company the second-best performer on the Mexican IPC
last year.
With the peso breaking through the 22 mark, will investors seize the opportunity to recover losses
on last year’s worse performing currency? No; or at least not in the short term, according to UBS
currency strategist Bhanu Naweja. Although his team calculates the currency is already pricing in
a roughly 70% chance that the US will impose a 20% tariff on Mexican exports, major risks are
still posed to the currency. Naweja asserted that the peso is unlikely to ‘do a Brazil’ (in reference
to performance of the real last year) because Mexico’s wider economy is especially weak, with the
current account deficit rising and negative GDP growth last quarter, unlike in Brazil.
Brazil has recently seen itself under economic pressure. On January 11th
the central bank of Brazil
(BCB) cut it’s key selic rate by 75bp to 13%. The move was predicted by just 4 of 48 analysts
surveyed by Bloomberg, mostof whom expected a 50bo downgrade. The BCB, lead by Ilan Goldfajn
voted unanimously in favour the increased cut. The rate cut comes as an attempt to further stimulate
spending and support a collapsing inflation rate (although inflation has dropped to within target,
many analysts forecast it may drop below the lower bound of 2.5% by the end of 2017). Later in the
month, the IMF cut its forecast for Brazil’s economic growth to just 0.2%. It seems apparent that the
unelected and increasingly unpopular President Michel Temer has neither the power nor ability to
take the drastic action required to lift Brazil out its worst recession in a century.
Alistair Grant