Intervention Risks Rise In Latin America

FX intervention is certainly in the air this week for Latin America. Brazil stands out as the most aggressive, of course, as the central bank intervened in the forward market Friday and in the spot market Monday

Developments continue to be bullish for Mexico

Given what we see as a basically hands off policy with regards to the exchange rate when MXN is appreciating, we see more potential upside for MXN compared to, say, BRL, where Brazilian authorities are clearly going to work against further currency strength. Others in Latin America are concerned with currency strength, including Colombia. As such, going long MXN vs. BRL or COP would be a good alternative too. On the other side, Banxico has installed circuit-breakers to help boost peso liquidity during times of stresses as part of an effort to prevent disorderly downside movement in the peso

Nervous Calm over Currency Market

A good reception to a Spanish bill auction and a some what better than expected German ZEW investor survey helped stabilize the risk sentiment which had been battered yesterday. The major foreign currencies are mostly firmer on the day, but the modest gains have left the short-term momentum indicators a bit over-extended. This would seem to favor early North American participants selling into the currency bounce

Eight thoughts at the end of a tumultuous Week

This has been an extremely tumultuous week throughout the capital and commodity markets. August itself has been a cruel month. The German stock market has lost around a quarter of its value. A marked slow down in the US and Europe in Q2 has given rise double dip fears in the former and compounding difficulty achieving deficit targets. There are a number of take-aways for investors from this week’s developments

Privatizing Will Make Life Worse

This article was published in the NYT more than 20 years ago, forecasting precisely what has happened in Russia

Populist Humala Wins Election, Negative For Peruvian Markets

Investors became comfortable with Lula’s economic team, his cabinet, and his general attitudes towards markets. The bottom line was that Lula inherited a strong, vibrant economy and was smart enough not to mess with success. Will Humala learn that lesson too

Debt Restructuring – Uruguay vs. Argentina

With markets now contemplating some sort of debt “re-profiling” by Greece, we thought it would be helpful to summarize the two most recent major debt restructurings by an EM borrower for some guidance on what such a move could imply for ratings, debt trajectories, and triggering CDS events. To us, it is clear that “re-profiling” is a euro zone euphemism for a soft debt restructuring that extend maturities and lowers rates, while “restructuring” now refers to a hard one that involves principal haircuts as well as potentially adjusting maturities and coupons too

A Credible Solution to Europe’s Debt Crisis

In April 1989, Mexico’s external debt negotiator, Angel Gurria, asked his country’s commercial bank creditors for a 55 percent haircut. This was the opening pitch of the newly created Brady Plan, which finally addressed both the debt overhang of developing countries and the weak balance sheets of their commercial bank creditors, ultimately resolving the LDC Debt Crisis.

More than twenty years later, Europe is in the midst of a similar sovereign debt and banking crisis. The EU is in a destabilizing feedback loop that it cannot control. Sovereign credit is deteriorating and this is reducing confidence in national banking systems, causing or increasing the likelihood that sovereigns will have to assume bank liabilities. This further impairs the sovereign credit and increases the lack of confidence in the banks.

We review the basic tenets of the Brady Plan in the context of our personal experience working on many of these sovereign restructurings and how they could apply in a comprehensive solution for the European debt crisis. The markets and the Eurozone desperately need a positive confidence shock in the form a comprehensive plan that simultaneously addresses the sovereign debt overhang and the balance sheets of European commercial banks

Diverging Inflation Paths In Brazil And Mexico

We are seeing divergent inflation paths in Brazil and Mexico, and today’s mid-April data underscored this point

Has oil’s demand destruction already arrived?

What we would like to see is commodity prices falling or stagnating. And that would certainly be the case if demand destruction is already beginning as the IEA analysis suggests. Moreover, QE is ending in June. So that won’t be a factor in inflation expectations. The ‘goldilocks’ scenario would be moderating commodity prices, followed by moderating global growth, followed by an increase in growth as inflation expectations come down

Strongly Rising Inflation in Brazil and Chile, Elections in Peru

In Peru, populist candidate Ollanta Humala won the most votes in the weekend presidential vote in Peru, winning 29.3% so far with 75% of the ballots counted. By falling far short of the 50% + 1 needed to win, a second round vote will be held in June and it looks like Humala will run against Keiko Fujimori, who has 22.9% of the vote.

In Brazil, the weekly central bank survey shows inflation expectations worsening. Year-end IPCA inflation is now expected at 6.26% vs. 6.02% last week. It is clear to us that macroprudential measures are not working, and that the central bank will need to keep hiking the SELIC rate. Expectations should move higher as inflation data deteriorates. Market is looking for a 50 bp hike at the April 19/20 meeting, and we think there is a good chance that the tightening cycle will continue at the June 7/8 meeting as well.

Meanwhile in Chile, USD/CLP remains within striking distance of the 465 level that triggered FX intervention back in early January. The Chile central bank will meet tomorrow and is expected to hike 50 bp to 4.5%, which would pull it even with Mexico in terms of rates. The economic outlook remains strong, and further tightening is expected into next year. The central bank’s most recent inflation report showed a material deterioration of the inflation outlook

Oil Prices and Rate Hikes Favor Latam FX Over Asia and EMEA

By Win Thin Malaysia central bank surprised the markets by hiking the statutory reserve requirement 100 bp bp while leaving policy rates unchanged at 2.75%. The bank noted that “While the stance of monetary policy is expected to remain supportive of growth, the degree of monetary accommodation may be reviewed given the sustained growth in