Latam Currencies Softening in the Wake of USD Recovery

The US dollar's recovery against the major currencies is corresponding with its recovery against emerging markets and the Latam currency performance is consistent with this . Both the Brazilian real and Mexican peso are about 0.5% lower in the early going.

The dollar had been flirting with the BRL1.75 support yesterday and is now testing offers in the BRL1.76 area. While we suspect that many investors are becoming less enamoured with Brazil, there is also appears to be another shift taking place. For most of the year so far, fixed income seemed to be the major draw, but recently it appears that equities have taken the leadership mantle.

Industry surveys and official data suggests that foreign investors bought about $500 mln of local and global Brazilian bonds in July, while EPFR reports that more than twice as much went into Brazilian equities. The Bovespa rallied 11% in July, it best monthly performance since May 2009. The dollar bond generated a return of almost 3.5% in July. Note that the Bovespa yields 3.3% while the 5-year dollar global bond yields about 2.6%.

Profit-taking is the theme of the day in global equity markets and the Bovespa is not immune. News of an actual decline in Chinese imports in July is also taking a toll on the Bovespa today, where early losses are in excess of 1%.

Brazil reports retail sales figures are due tomorrow and the 1.4% jump in May cannot be sustained. Risk is of a weaker than expected report. The consensus forecast is for a 0.3% rise.

The Mexican peso is under pressure as well. Of the regional currencies, it seems the most sensitive to the FOMC meeting, which is not surprising given that the US is the destination of around 7/8 of Mexico's exports.

Yesterday Mexico report a very slight softening of inflation in July (to 3.64% from 3.69%). Inflation appeared to peak in March just below 5%.

While Brazil's Selic rate looks to peak earlier than previous was expected, the easing of inflation pressures and tame core rate has eased pressure for the central bank of Mexico to tighten policy too.

It is a fairly light economic calendar week for Mexico. Auto production figures are out today and some slowing is expected. Tomorrow June industrial production figures are released. The consensus expects an unchanged year-over-year rate of 8.4%.

The dollar looks poised to rise back into the MXN12.80-MXN13.00 are ain the coming days. Support now is seen near MXN12.60. Discretionary operators may look at long BRL/short MXN positions. The real has support in the MXN7.18-7.20 area. On the upside, the first target is near MXN7.30.