Calling End to Latin American Currency Rout a Fool’s Errand

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The $5.3 trillion foreign-exchange market is losing confidence in the ability of Latin America’s leaders to turn the region’s flagging economy around.

Brazil’s real is the world’s worst-performing major currency this year, plunging 21 percent. Mexico’s peso is at a record low. Venezuela’s black-market bolivar has depreciated so much that a monthly minimum wage now fetches just over $11.

The worst may be yet to come. Already reeling from a rout in commodities that has slowed growth to little more than a standstill, the region is now being rocked by corruption scandals in the two biggest economies: Brazil and Mexico. Strategists at Morgan Stanley said in a July 15 report they couldn’t find one Latin American currency to recommend.

“It’s hard to say anything positive,” Win Thin, the New York-based global head of emerging-market strategy at Brown Brothers Harriman & Co., said by telephone. Countries that boomed with the surge in commodities prices are “now seeing the other side.”

Latin America is expected to grow just 0.1 percent this year, less than any other region in the world, according to economists surveyed by Bloomberg. Even Eastern Europe, which faces recession in war-torn Ukraine and sanctioned Russia, will expand 0.3 percent.

What a change that is from five years ago, when Latin American economies averaged 6.6 percent growth, more than twice that of developed economies.

‘More to Come’

Forwards trading shows every major currency in the region is heading for a multi-year -- if not a record -- low. Argentina and Venezuela, which printed money instead of cutting spending in the wake of the commodities tumble and now boast the world’s fastest inflation rates, are heading for major devaluations, economist forecasts show.

Brazil’s real plunged to a 12-year low Friday, losing 1.8 percent to 3.35 per dollar as of 4:27 p.m. in New York. The Mexican peso dropped to a record low of 16.25 per dollar, and futures traders were the most bearish on the currency since

1995. The Chilean peso slid to a six-year low of 661.1.

“Despite the underperformance in Latin America thus far, we believe that there is more to come,” Morgan Stanley strategists led by Felipe Hernandez wrote in a research note to clients. “Perhaps what is more worrisome is that we are seeing signs of deterioration on fronts where we had previously been more constructive,” including Chile and Mexico.

While corruption allegations have ensnared the administrations of leaders from Mexican President Enrique Pena Nieto to Chilean President Michelle Bachelet, no country is facing a bigger confidence crisis than Brazil. President Dilma Rousseff’s approval rating has fallen to about 15 percent.

Bright Spot

Rousseff is struggling to slow above-target inflation amid growing talk of impeachment. A sweeping investigation has ensnared her predecessor and leaders of both houses, undermining the political support Rousseff needs to drive through fiscal measures to stabilize the economy. On Wednesday, the government asked lawmakers to approve a reduction in its 2015 primary budget surplus, sparking concern that the nation will lose its investment-grade status.

Those looking for a bright spot should consider Brazil’s real-denominated longer-maturity bonds, which may benefit from central bank rate cuts once inflation gets under control, said Jorge Mariscal, chief investment officer for emerging markets at UBS Wealth Management.

“It’s likely in the next three to six months the interest-rate cycle peaks,” Mariscal said by telephone from Washington D.C.

And the Mexican peso “looks among the cheapest currencies you can find,” he said. Expectations the central bank will follow the U.S. Federal Reserve in raising rates “should support the peso.”

‘Important Headwinds’

Oil, which has lost 50 percent over the last year, is the biggest source of export revenue for Venezuela, Colombia and Ecuador. In Chile, copper, which makes up half of the nation’s exports, has plunged to its lowest level since 2009 amid waning demand from China.

Prices for soybeans and iron ore have also slumped in recent weeks, with a Bloomberg measure of commodity prices declining to its lowest in more than 13 years Friday.

“The terms-of-trade shock is reducing some of the growth momentum for the region’s well-managed countries and at the same time exacerbating poor economic policymaking elsewhere,” Pablo Goldberg, who helps manage $9.5 billion of BlackRock Inc.’s emerging-market debt, said by phone from New York. “Latin America is facing very important headwinds.”