In 2022, Mexico and Brazil’s currencies have taken diverging paths

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Mexico’s peso and Brazil’s real are among the best-performing currencies globally against the dollar this year, but their performance could diverge as political and economic risks cloud their outlook, analysts said.

Since the start of the year, the Mexican currency has strengthened 2.3% against the dollar while the real has appreciated 6.8%. That is no mean feat against a dollar up almost 19% versus a basket of peers this year and scaling levels last seen two decades ago.

The contrast is also stark with regional peers such as Colombia’s peso, down 17% under the weight of political uncertainty.

So far, the strength of the Mexican and Brazilian currencies is tied to fundamentals, with healthy current account balances and rate differentials enticing traders and investors.

“What makes those Latin American currencies attractive in a way that East Asia is not, is that the two big themes this year seem to be commodities and rates – and both Brazil and Mexico have been fairly aggressive (in hiking)” said Marc Chandler, chief global strategist at Bannockburn Global Forex in New York.

With the Mexican benchmark rate at a record 9.25% and Brazil’s at 13.75%, both offer some of the highest differentials to even the Fed’s estimated 4.6% peak rate sometime next year. With inflation expected at 5.8% by year-end, Brazil’s positive real rates near 9% are among the highest in the world.

But electoral volatility could take away some of the currency’s shine as Brazilians head to a runoff between former president Lula da Silva and incumbent Jair Bolsonaro on Oct. 30, with markets more bullish on a Bolsonaro win, said Dirk Willer, head of emerging market strategy at Citi Research in New York.

Source: El Financiero

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