The Brazilian real and the Colombian peso should be the currencies that show the greatest resilience during the geopolitical tensions in the Middle East, as they are net exporters of oil. Even so, the most notable movement for Ebury is the appreciation of the dollar of between 1% and 4% against the Latin American currencies that they usually cover, “given the shift that has taken place in global markets toward safe-haven assets.”
In its latest report, the firm’s experts highlight that the Chilean peso appears especially vulnerable as it is one of the largest net importers of oil among emerging markets. “In addition, the weight of energy in the national CPI is relatively higher than in other countries,” they add. By contrast, the second key conclusion of the report is that in Peru, local disruptions in the supply of natural gas have further worsened the situation.
The Brazilian real (BRL)
According to Ebury’s report, the Brazilian real has corrected some of its losses, but it has still depreciated by 1.5% against the greenback since the conflict in the Middle East escalated. “As a net exporter of oil, the Brazilian real should be less impacted than other emerging market currencies by the recent rise in oil prices. However, it has not emerged completely unscathed from the generalized flight toward safe-haven assets and currencies such as the dollar,” they note.
As for economic data, which have been completely overshadowed by the geopolitical conflict, Brazil’s fourth-quarter GDP growth came in line with expectations, registering a modest expansion of 0.1% quarter-on-quarter. According to their analysis, this clearly reflects the high interest rates set in Brazil, which they also believe have recently caused some slowdown in the labor market: the unemployment rate rose to 5.4%, although it remains close to historical lows. “Looking ahead, we still believe that Brazil’s central bank will begin its rate-cutting cycle this year, but it may act more cautiously while the conflict in the Middle East persists,” they conclude.
The Chilean peso (CLP)
As indicated in the previously mentioned conclusions of the report, the Chilean peso is one of the currencies most affected by the conflict in the Middle East, and not only at the regional level. “Chile’s position as a net importer of oil, together with the fall in copper prices amid the possibility of weaker global demand, have been the main factors behind the depreciation of the peso, which exceeded 4% last week. Given the risk of an inflationary rebound if the conflict drags on and if oil prices remain elevated, swap markets have drastically adjusted their expectations for rate cuts by the Central Bank of Chile this year,” Ebury argues.
They also highlight that just a few weeks ago markets were pricing in a rate cut at the next meeting with a probability close to 70%; now that figure has fallen to around 25%. “As a result, it is reasonable to anticipate a cautious BCCh at its next Monetary Policy Meeting, despite the recent slowdown in inflation observed in February. As long as geopolitical uncertainty persists and clear signs of de-escalation do not appear, the Chilean peso, like other emerging market currencies, will remain under downward pressure,” the report notes.
The Colombian peso (COP)
In the case of the Colombian peso, Ebury’s analysis indicates that it has also been one of the most resilient currencies in Latin America since the conflict in Iran broke out, as it is a net exporter of oil. That said, the document notes that it has also lost ground against the greenback (just over 1%) amid the generalized flight from risk assets and currencies.
In addition, the parliamentary elections do not appear to have had a significant impact on the exchange rate, with the expected political fragmentation taking place. “Pacto Histórico emerged as the political force with the greatest representation in Congress, while the strong result of Paloma Valencia puts her in a good position to compete with De la Espriella for the right-wing vote. Given the high percentage of undecided voters, the potential outcome of the presidential election continues to generate uncertainty in the local market, which could add a risk premium to the peso,” they note.
The Mexican peso (MXN)
For its part, the Mexican peso has fallen by more than 3% against the greenback since the outbreak of the conflict. According to the report, amid the possibility of higher inflation, markets have stopped pricing in rate cuts by Banxico. “In addition to developments in oil prices and geopolitical tensions, markets will closely monitor the negotiations over the USMCA, which are scheduled to begin next week,” they note.
In part, according to their view, this could be positive news for the Mexican economy, as trade uncertainty could dissipate sooner than expected. However, they believe that the net impact on the economy and the Mexican peso will depend largely on the content of the agreement that is ultimately ratified. In this sense, Ebury’s forecast is clear: additional volatility around the Mexican peso can be expected in the coming weeks.
The Peruvian sol (PEN)
Finally, the report highlights the performance of the Peruvian sol, which has fallen almost 4% since the first attacks by the United States and Israel on Iran, depreciating to levels not seen since late September. It is worth recalling that, as a net importer of oil, Peru is vulnerable to this energy shock.
“Although it started from more favorable inflation levels than other countries, a leak in a gas pipeline in the south of the country is causing a severe shortage, leading to energy rationing across different sectors. A significant rebound in inflation is expected in upcoming readings, which will partially correct once the leak is repaired. This is believed to take approximately two weeks. In this regard, it will be interesting to analyze how the BCRP responds to these developments at this week’s meeting,” Ebury concludes.
