The world’s least favorite currencies suddenly became global leaders
(Bloomberg) – Latin American currencies have staged a rebound since mid-May on new signs of renewed global growth and as central banks pour liquidity into the system. Technical barriers to further gains are few and far between.
Brazil’s real has been almost 17% since May 15, while the Mexican peso has risen by more than 11% – the largest gain among 24 currency markets tracked by Bloomberg. These two currencies had previously suffered losses, falling by 31% and 21% respectively this year through mid-May.
A general easing of volatility and gains in assets in emerging markets around the world helps lift Latin American currencies. But there are also idiosyncratic factors in the game. The return on the carry trade in Mexico, diminishing political tensions in Brazil and higher prices for Chile and Peru also contributed significantly. Such is the new risk appetite for investors to turn a blind eye to the pandemic, even though Latin America now accounts for 40% of coronavirus deaths worldwide.
“The market seems to be pulling away all the bad news,” said Delphine Arrighi, a London-based portfolio manager at Merian Global Investors. The rally is the result of ample liquidity offered by central banks, cheap valuations and some shutdowns lifted, even as political risks flare up, she added.
The Chilean peso strengthened past its 100-day moving average on May 20, rising through the 200-day average in less than two weeks, reaching an overbought range based on the relative strength index, falling only 2% this year. Colombia’s peso is now also overbought after trimming the losses in 2020 to approx. 8%.
The Mexican peso was also strengthened beyond its 100-day moving average on Tuesday by approx. 5% to go before reaching the next key resistance of the 200-day average. The Brazilian real is more than 2% away from his 100-DMA, and a breach could pave the way for another 9% rally before hitting the 200-DMA.
“Eventually, we will start to see some profits and investors will pay attention to details again,” said Merian’s Arrighi. “But we’re probably not quite there yet.”
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