Latin America FX Forecast Revision
The COVID-19 pandemic has hit the Latin American region particularly hard since the onset of the crisis. Read on to find out how Brazilian Real, Chilean Peso, Colombian Peso, Mexican Peso and Peruvian New Sol have been affected.
FX Market Updates
The COVID-19 pandemic has hit the Latin American region particularly hard since the onset of the crisis. Authorities in the region have, for the most part, struggled to rein in aggressive levels of virus contagion. All five of the LatAm nations that we cover in this report feature among the top 16 countries with the highest number of reported COVID-19 cases in the world. As a percentage of the population, Peru and Chile have fared the worst (Figure 1), although this fails to account for the so far limited levels of testing conducted in Mexico (around 19,000 tests per 1 million people versus 139,000 in Peru and 234,000 in Chile).Figure 1: COVID-19 Confirmed Cases [per 1M people] [Latin America] (as of 06/11)
Source: Refinitiv Datastream Date: 03/11/2020COVID-19 deaths as a percentage of the population, which tends to provide a more accurate representation of the severity of the virus’ spread in counties with inadequate levels of testing, also has Peru as the worst affected country in the region. Barring the microstate of San Marino and Belgium, Peru currently has the highest number of COVID-19 deaths per capita in the world (1,044 per 1 million people) according to worldometers. Brazil (752), Chile (746) and Mexico (712) are not too far behind, with Colombia having the fewest fatalities per capita of the five thus far (620).Figure 2: LatAm COVID-19 Deaths [per 1M] [4-week moving average] (Mar ‘20 - Oct ‘20)
Source: Refinitiv Datastream Date: 28/10/2020As has been the case across the globe, the various national and regional measures put in place to limit the spread of the virus have weighed significantly on economic output in Latin America. As a consequence of its much stricter lockdown measures, Peru’s economy suffered from the largest contraction of all the Latin American countries we cover in the second quarter of the year (-27.2% QoQ), with Brazil (-9.7%) experiencing the smallest. Since then, we have witnessed a generalised rebound in economic output in the region as restrictions have been gradually unwound. Consumer spending, as represented by retail sales, has bounced back sharply in some instances (notably in Brazil and Chile), where large levels of fiscal support have been made available by the local government, and remained subdued in others (such as Colombia and Mexico). Unemployment has eased since the peak of the crisis, although remains high in the region and above pre-pandemic levels in all five countries, considerably so in Peru (+9.4 p.p).Figure 3: LatAm Macroeconomic Performance [during COVID-19 pandemic] 
Source: Refinitiv Datastream Date: 28/10/2020The outbreak of the pandemic triggered an aggressive risk-off mode in financial markets during the first quarter of 2020. While most emerging market currencies have rebounded from their lows, the majority continue to trade lower versus the US dollar year-to-date, including all five of the Latin American currencies in this report. The Chilean peso (CLP) has proved the most resilient, currently trading almost flat versus the USD YTD (Figure 4). By contrast, the Brazilian real has sold-off aggressively in the past few months and has been one of the worst performing currencies in the world this year.Figure 4: Latin America FX Performance vs. USD [% change] (YTD)Generalised criticism of Brazilian authorities’ handling of the pandemic was behind much of the real’s dramatic collapse in the second quarter of the year. Far-right President Jair Bolsonaro has adopted a troublesome approach to dealing with the outbreak of the COVID-19 virus, actively encouraging people to defy social distancing, ignore regional lockdown and partake in large gatherings. He has also given the green light for the mass distribution of the pill chloroquine, despite the lack of scientific evidence that it helps treat the virus. Brazil has now racked up the third largest number of reported cases of the virus in the world, in excess of 5.5 million, and over 160,000 deaths at the time of writing. These numbers are likely much higher in reality due to relatively limited levels of testing - 103 tests conducted per 1,000 people versus 450 per 1,000 in the US. New daily cases of the virus have, however, begun to ease gradually in Brazil in the past few weeks, albeit very gradually. The one week moving average of deaths caused by the virus has also slowed, although again only very gradually and at a rate much slower than witnessed among developed nations. Reports that the majority of the population in some of Brazil’s largest cities ignored isolation orders is likely to have helped spread the virus at a faster rate that we have witnessed across much of the rest of the world. This inability to rein in the number of new infections risks anchoring Brazil in a prolonged recessionary period. The Brazilian entered back into recession in Q2, posting a record 9.7% quarter-on-quarter contraction. Activity data since then has been largely encouraging, notably the jump in retail sales back into positive annual territory in each of the three months through to August. Sales grew by a record 6.1% year-on-year in August, largely due to an easing in virus restrictions and fiscal stimulus targeted at low-income families. Momentum in consumer spending activity does, however, appear to be easing and is expected to slow further should fiscal support be unwound before the end of the year, as is expected. Figure 2: New Daily COVID-19 Cases [Brazil] (March ‘20 - November ‘20)
Source: Refinitiv Datastream Date: 03/11/2020COVID-19 deaths as a percentage of the population, which tends to provide a more accurate representation of the severity of the virus’ spread in counties with inadequate levels of testing, also has Peru as the worst affected country in the region. Barring the microstate of San Marino and Belgium, Peru currently has the highest number of COVID-19 deaths per capita in the world (1,044 per 1 million people) according to worldometers. Brazil (752), Chile (746) and Mexico (712) are not too far behind, with Colombia having the fewest fatalities per capita of the five thus far (620).Figure 2: LatAm COVID-19 Deaths [per 1M] [4-week moving average] (Mar ‘20 - Oct ‘20)Source: Refinitiv Datastream Date: 28/10/2020As has been the case across the globe, the various national and regional measures put in place to limit the spread of the virus have weighed significantly on economic output in Latin America. As a consequence of its much stricter lockdown measures, Peru’s economy suffered from the largest contraction of all the Latin American countries we cover in the second quarter of the year (-27.2% QoQ), with Brazil (-9.7%) experiencing the smallest. Since then, we have witnessed a generalised rebound in economic output in the region as restrictions have been gradually unwound. Consumer spending, as represented by retail sales, has bounced back sharply in some instances (notably in Brazil and Chile), where large levels of fiscal support have been made available by the local government, and remained subdued in others (such as Colombia and Mexico). Unemployment has eased since the peak of the crisis, although remains high in the region and above pre-pandemic levels in all five countries, considerably so in Peru (+9.4 p.p).Figure 3: LatAm Macroeconomic Performance [during COVID-19 pandemic] Source: Refinitiv Datastream Date: 28/10/2020The outbreak of the pandemic triggered an aggressive risk-off mode in financial markets during the first quarter of 2020. While most emerging market currencies have rebounded from their lows, the majority continue to trade lower versus the US dollar year-to-date, including all five of the Latin American currencies in this report. The Chilean peso (CLP) has proved the most resilient, currently trading almost flat versus the USD YTD (Figure 4). By contrast, the Brazilian real has sold-off aggressively in the past few months and has been one of the worst performing currencies in the world this year.Figure 4: Latin America FX Performance vs. USD [% change] (YTD)Generalised criticism of Brazilian authorities’ handling of the pandemic was behind much of the real’s dramatic collapse in the second quarter of the year. Far-right President Jair Bolsonaro has adopted a troublesome approach to dealing with the outbreak of the COVID-19 virus, actively encouraging people to defy social distancing, ignore regional lockdown and partake in large gatherings. He has also given the green light for the mass distribution of the pill chloroquine, despite the lack of scientific evidence that it helps treat the virus. Brazil has now racked up the third largest number of reported cases of the virus in the world, in excess of 5.5 million, and over 160,000 deaths at the time of writing. These numbers are likely much higher in reality due to relatively limited levels of testing - 103 tests conducted per 1,000 people versus 450 per 1,000 in the US. New daily cases of the virus have, however, begun to ease gradually in Brazil in the past few weeks, albeit very gradually. The one week moving average of deaths caused by the virus has also slowed, although again only very gradually and at a rate much slower than witnessed among developed nations. Reports that the majority of the population in some of Brazil’s largest cities ignored isolation orders is likely to have helped spread the virus at a faster rate that we have witnessed across much of the rest of the world. This inability to rein in the number of new infections risks anchoring Brazil in a prolonged recessionary period. The Brazilian entered back into recession in Q2, posting a record 9.7% quarter-on-quarter contraction. Activity data since then has been largely encouraging, notably the jump in retail sales back into positive annual territory in each of the three months through to August. Sales grew by a record 6.1% year-on-year in August, largely due to an easing in virus restrictions and fiscal stimulus targeted at low-income families. Momentum in consumer spending activity does, however, appear to be easing and is expected to slow further should fiscal support be unwound before the end of the year, as is expected. Figure 2: New Daily COVID-19 Cases [Brazil] (March ‘20 - November ‘20)