Alphacast Highlight - The US Dollar strenghtened in 2022. How has Latin America fared?
Alphacast Highlight - The US Dollar strenghtened in 2022. How has Latin America fared?
By Maia Mindel (mmindel@alphacast.io)
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Through 2022, the US Dollar saw record-high appreciation in Q3 and early Q4, peaking at 18% YTD (DXY Index) - second only to the 26% registered during the Volcker Shock and its astronomical interest rates. However, the dollar normalized in November and December, finishing at a high rate (8%) but not one without precedent in the last 50 years. Over the first two months of 2023, the US dollar has continued moderating, showing a mild weakening though within normal historical parameters.
The currencies of the major economies of Latin America have proven surprisingly resilient, since all but two countries outperformed the dollar in 2022. This stands in contrast to major currencies such as the Euro, which fell 6.1% YTD against the dollar by the end of the year. Some of the region's economies saw changes in line with inflation by the end of 2022, with Argentina showing a depreciation of 41% YTD and Colombia also seeing a large fall in the FX, of 14.7% YTD. Chile, meanwhile, also saw a depreciation, but a more modest one - of 1.2% YTD. The rest of the region's major economies saw appreciation in their currencies, with Uruguay's exchange rate growing 15.5% YTD, and the exchange rates of Brazil, Mexico, and Peru all saw appreciation in the 5% YTD range.
Uruguay remains a stand-out in Latin America. The Uruguayan peso was the strongest performer in 2022, showing noticeable appreciation (15.5%), and has continued at a strong position in 2023, showing little change. Uruguay began its tightening of monetary policy in mid-to-late 2021, in line with the rest of the region and ahead of major economies, and interest rates grew from 4.5% to 11.5%. Though inflation remained high in 2022, the country had a smaller acceleration from previous levels, since headline rates spiked in 2021 as well. Consequently, recent printings have not been significantly above the average level observed over the past decade. FX over-appreciation will prove to be the biggest risk for Uruguay, since the real exchange rate has been markedly above its recent average as of late.
The Brazilian Real proved resilient in a tumultuous political context. After a strong performance, of 5.8% in 2022, the Real has continued to remain stable - despite a tumultuous presidential transition and relative uncertainty over future political developments. Brazil has led monetary tightening in the region, starting earlier than all others (in February 2021) and hiking the furthest and the fastest - from 2% to 13.75% over the past two years, though rates have not grown since August. Inflation, meanwhile, has eased somewhat in recent months, though it still remains markedly above the BCdB's target range. Given these recent developments, and especially following a weaker performance of the Real beforehand, the REER has not excessively appreciated in Brazil.
Mexico's currency shows strong performance in early 2023. After an unremarkable appreciation of 5.3% in 2022, the Mexican peso has enjoyed the strongest performance of any Latin American currency in the first two months of the current year, growing 8.1% YTD by early March. This follows a decade where the MXN has been one of the least volatile currencies in the region - however, the close ties between the Mexican and US economies have impacted the Peso during the current strenghtening of the global reserve currency. This has resulted in an interesting dynamic, where the REER has shown little change versus the US dollar, but has significantly apppreciated against the rest of Mexico's trade partners. Inflation, meanwhile, has somewhat plateaud at similar levels as Peru (the 8% YoY range), even as Banxico accelerated its pace of rate hikes in 2022 - the policy rate has grown from 4.5% in September 2021 to 11% as of late.
Peru remained steady amid political chaos. The Peruvian Sol showed little appreciation in 2022, growing just 4.7% - and has remained relatively stable through the first two months of 2023 as well. This is surprising given recent political turmoil in Peru, following a chaotic change in the Presidency and no clear sign of how future policies may develop - it may, in fact, be a sign of expected deadlock in a highly polarized society and a largely atomized legislature. Monetary policy tightening has been largely slower than the rest of the region, with rates starting to grow in August 2021, from 0.25% but with hikes tapering off at around 7.75% presetnly. Inflation, meanwhile, has reached a plateau at around 8.5% YoY, which is miles above the Central Bank target and still above inflation. Regardless, forecasts are optimistic for price growth, especially given a REER that has returned to its pre-pandemic levels.
Colombia's currency tentatively recovers from worst-in-the-region performance. After the second worst performance of 2022, appreciating 14.7%, the Colombian peso has strengthened somewhat, appreciating 7.5% YTD in 2023. This follows a year with major political developments, since the country has elected its most left-wing government in recent memory, resulting in heightened uncertainty in both sovereign spreads and business confidence. Inflation has also been high in Colombia, having the highest rate (excluding Argentina) in the region at 13.1% in February - which comes as no surprise, given that it was the last country to begin tightening policy in October of 2021, and has had to ramp up hikes recently - rates increased from 2% at the beginning of the cycle to 12.75% over the last few months.
Chilean peso starts turning the picture. The Chilean currency showed a dismal performance throughout 2022, with the FX showing a contraction in the 10% range in Q3-22. However, the exchange rate stabilized somewhat later on in the year, and by December its performance had normalized to a tepidly negative -1.2% YTD. Over January and February, the Chilean peso has regained strength, appreciating 7.5% YTD by early March. Chile's inflation rate was the second highest (after Argentina) in the region for most of last year, and has only recently began to ease - but still stands above most other peer countries. Monetary policy, in contrast, has largely remained in the middle of the pack, not tightening too early or too late and raising rates from 0.75% in July 2021 to 10.5% in early 2023. The REER, as of late, has slowly normalized, after the monetary chaos of the past two years raised it significantly.
Argentina remains problematic in multiple fronts. The country with the highest inflation rate among the major Latin American economies, Argentina, also saw the highest depreciation in 2022, with the Peso dropping 41% compared to the dollar - and has fallen 9.5% YTD so far in the first two months of the year, worse than any other country in the region. 2022 was a volatile year, marked by a full-blown crisis in the Cabinet and sudden, drastic devaluations in the parallel rates. Inflation reached a 30-year-high in this country, at 94.8% YoY in 2022, and is not expected to come down meaningfully; interest rates, meanwhile, were only raised from 36% in December of 2021, and have peaked at 75% - a value unchanged since September. Monetary, fiscal, and financial imbalances are not expected to undergo any meaningful changes in 2022, a presidential election year with poor prospects for the incumbent coalition.
