US monetary policy change triggers fall in LatAm currencies

Wednesday, August 21, 2013

A change in US monetary policy has triggered a sell-off across all Latin American currencies this month with the Brazilian real taking by far the biggest hit, Capital Economics said in a report.

"Latin American currencies have come under renewed pressure in August. All of the region's currencies have weakened against the dollar, in line with a broader retreat from emerging markets (EMs), as investors weigh up the implications of a less accommodative US monetary policy."

The Brazilian real has lost around 16% against the US dollar during the last three months and dropped to a four-year low on Wednesday after US Fed meeting minutes showed broad support for reducing the current monetary stimulus if the economy improves.

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The real's sharp slide prompted Brazil's finance minister Guido Mantega to come out earlier this week and comment on the situation.

"The situation is under control and we have US$370bn in reserves to face any major problem," he said.

Mantega attributed the real's strong fall to the potential changes in US monetary conditions as well as speculation.

Capital Economics believes, however, that the real's sharp drop has not only been a result of global factors.

"In addition to broad global trends, local factors have played a part in foreign exchange movements. In Brazil's case, overseas investors have started to question the sustainability of an economic model which is excessively dependent on credit growth," the London-based firm said. "Moreover, the sheer size of the recent fall in the real reflects the extent to which Brazil's currency had become one of the most overvalued in the EM world," it added.

For his part, Brazil's central bank president Alexandre Tombini canceled a planned trip to the US which Nomura Securities noted may not have been the timeliest decision given that the real "continues to move only in one direction and the market will continue to focus on the potential inflation pass through with this speed of depreciation."