The strengthening of the Chilean peso against the dollar is gaining momentum. USD/CLP is losing 2.2% from last Friday’s peak levels. As the FxPro analyst team mentions, a rebound in risk appetite in global equity markets and increased interest in commodity currencies has triggered a wave of peso buying after an 8.5% rise from the lows of early September.
Partly behind the latest wave of optimism on emerging market currencies is the strengthening of the renminbi on news of payment from Evergrande. This news somewhat eases the pressure on debt markets by reducing fears of a domino effect on EM debt markets. In addition, the US surprised markets with unexpectedly weak industrial production data, reviving speculation that the Fed might not rush to tighten monetary policy, which plays into the hands of demand for risky assets.
The USD/CLP could pull back rather quickly into the area of 800-805, a significant psychological mark. A break below that would suggest a broader trend of dollar weakness and renewed interest in commodity currencies.
The Brazilian real is stabilising near 5.50 after declining 0.7% against the US dollar on Monday when it went under pressure amid lowering iron ore prices. Under scrutiny here, is the 5.40 level. A fall below would send the pair searching for support near the lower bound of last months’ trading range 5.22-5.25.
At the same time, inflation in Latin America continues to accelerate, requiring central banks to tighten monetary policy commensurately. Currently, Brazil's monetary policy looks the softest, where inflation reached a double-digit rate of 10.25% in September and now exceeds the key rate by 4.0 percentage points. Earlier in September, inflation expectations indicated a sharp reversal, but the latest rally in commodity and energy prices are probably pushing forward and raising the turning point.
Strictly speaking, this difference leaves considerable downside potential for the real against the dollar. The Brazilian central bank has increased its rate hike from 75 points to 100 since July but has lagged behind inflation by maintaining its growth selling tactics in the BRL. The Brazilian central bank is unlikely to decide on a sharper than 100-point rate hike at its next meeting on 26-27 October.
The FxPro Analyst team mentioned that the other countries with the most significant differential between inflation and key rate are Chile and Colombia. However, inflation is noticeably lower than in Brazil, giving the central bank more room to wait and see and encouraging economic recovery. Viewing inflation as less of a transitory phenomenon, we believe that the Central Banks in Colombia and Chile should not rest and be prepared to tighten monetary policy more sharply to keep inflation under control and avoid unnecessary turbulence in the economy in national currencies.