LatAm FX will remain at the mercy of external factors - Rabobank

Christian Lawrence, Senior Market Strategist at Rabobank, suggests that the Latam FX will remain at the mercy of external factors and in particular global liquidity and central bank policy.

Key Quotes

“We expect to see more easing from both the ECB and BoJ over the course of the next year and this should be supportive of EM currencies. That said, the LatAm region is more vulnerable to rising US rates and USD and although we expect a cautious approach, we do see Fed embarking on a tightening cycle that is not fully priced in by the market.

In addition, our resident PBOC watcher, Mike Every, is still calling for further upside in USD/CNY which we expect to rise above 7 in 2017 and this could lead to rising risk aversion weighing on EM currencies. As such, LatAm FX downside is likely to be the path of least resistance going forward. We expect MXN to be a notable underperformer despite the relative strength of its economy in the region as global risk factors weigh on high beta names.

If we see central bank credibility continue to decline and the market becomes increasingly disillusioned with attempts at easing in the Eurozone and Japan then the potential for a sharp global risk off move remains real.

Central bank policy in the Eurozone and Japan is not solving the issue of structurally lower growth and inflation. Instead, negative rates and QE are fueling asset price inflation while lowering productivity and in turn dampening wage growth. This thinking seems to be gaining some traction and a halt to easing would weigh on risky assets globally, including LatAm currencies.”