Phase-one signing aftermath on LATAM

LATAM currencies are mixed following the signing of the US-China phase-one deal.  Three years of trade tensions are finally seeing a reprieve in what should deliver a boost to the global economic outlook.  This phase-one deal however does not indicate that markets should expect the end of the trade war between the world’s two largest economies.

Over the past couple years, Brazil’s soybean exporters have been the biggest winner with their sales surging as China shifted their purchases away from the United States.  Brazil is now the top soy producer in the world and have already committed to expansion plans that will see soy prices weighed down on strong supply forecasts.

China is expected to buy more soy from the US, but that doesn’t mean Brazil will completely lose all of the recently gained market share.  China will ultimately buy soy from whoever offers the best prices. Soy prices are likely to remain under pressure and while the US will likely see some purchases from China, Brazilian soy has a much more attractive price.  The Brazilian real initially weakened on the trade-deal signing, but should firm up on improving Brazilian economic data.

Argentina

The Argentina peso is not getting much of a benefit from the emerging market rally that has stemmed from an improved global economic outlook following the trade truce between the world’s two largest economies.  Argentina’s peso is hampered with high inflation that is not going anytime soon.  The outlook for the worst performing currency over the past two years is for further pain.  The Argentina peso could fall to 90 by the summer time.

Chile

Chilean President Pinera approval ratings continue to plummet as big changes will need to happen to revive the economy.  Despite a slight rally in the Chilean peso following the announcement of bill that would reform the country’s pension system, most of the news from Chile highlight more stimulus is needed for the economy and that suggest unsustainable debt levels will remain in place.

Mexico

The Mexican peso could see weakness in the coming week as investors abandon their peso trade once the US Senate approve the USMCA trade deal.  The peso’s recent appreciation will likely see the ‘buy the rumor, sell the news’ reaction.  The peso is the only LATAM currency to rally against the greenback in 2020 and we could see that trade temporarily unwound in the short-term.  The 18.75 level will remain the line in the sand for the peso, but we should not see it weaken beyond 19.25.

Colombia

With Colombia’s outlook starting to look like the best of breed in Latin America and we could see the peso outperform in 2020.  This year, Colombia’s economic outlook could see the 3.0% GDP growth, alongside moderate inflation, but with a high unemployment rate that is likely to remain above 10%.  Colombia’s peso will likely start to see strong carry trades as the economy outperforms in the region and as they maintain a strong interest rate differential.  Markets like the BanRep as they showed stability during last year’s peso freefall that fell to a record low in November.  If the Banrep keep policy steady in 2020, we could see this be a banner year for the Colombian peso.

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