When it comes to currency exchange rates, especially concerning the dollar, LatAm locals are a very sharp collective crew.On Thursday I ran a kind of informal poll by contacting friends and acquaitances up and down the region, and I made it a point not to talk with people in the financial sphere. So in Colombia, Ecuador, Uruguay, Peru, Venezuela, Argentina, Chile and Brazil, a dozen or so people got phone calls or mails (or both) asking them what local feeling was about the exchange rates.
Without exception, the answers came back with variations on "people are selling dollars and buying local currency", which pleased me no end because not only did it agree with my current take on the overbought dollar (see chart here for example, plenty more though) but it confirmed once again the wisdom of the masses down here. I've seen this phenomenon many a time; when the dollar gets past a certain point against local currency, saved greenbacks suddenly appear from under mattresses, behind clocks and between hardback books. Queues form at exchange houses. Foreigners who get paid in USD go around with big smiles on their faces because it's like getting a 10% payrise (myself included on that one).
Here we see a range of three month charts for local currencies against the dollar (all on these quick'n'easy yahoo charts that I like), and look how they all peaked at the same time:
The Argentine Peso
The Brazilian Real
The Colombian Peso
The Chilean Peso
The Peruvian Nuevo Sol
The effect of a weaker currency is good news for exporters. This means that the net exporting countries of the region will be happy with this drop. However, weaker currencies also mean higher imported inflation, and countries such as Peru that have expanded rapidly and have seen their trade balance dip into the negative recently (despite record metals exports) will be a little concerned about this move.
In fact, the Peru Sol (PEN) is a good example of a currency to buy right now and I expect it to be encouraged back up by local monetary policy in the next few weeks, with my personal chalkboard target currently set at S/2.80 (from today's S/2.97).
Another currency likely to improve rapidly is the Chilean Peso (CLP) as copper prices rebound and the country gets back toward a 5% growth rate. Most economists in Chile have forecast an exchange rate of around 500 to the dollar at year's end, and that seems perfectly logical to me. A good vehicle to play this bounce would be ECH, the Chilean ETF available on the NYSE. It's a very misunderstood ETF (from nearly all literature I've seen written on it in English), because contrary to most people's perception it's much more a play on Chile's currency than on its stock market. I fully expect ECH to gain around 20% from here and end the year in the U$48 to U$50 range.
Anyway, I digress. The point of this post was to show that locals are pretty astute at the currency exchange game down here. All last week the foreign tide of dollars went into ebb mode and money was sucked away from the region (mainly Brazil). Locals saw their chance and cashed in on the strong dollar exchange rate. I'd now expect the smart ones among them to buy back those dollars in ten percent's time.
In fact, the Peru Sol (PEN) is a good example of a currency to buy right now and I expect it to be encouraged back up by local monetary policy in the next few weeks, with my personal chalkboard target currently set at S/2.80 (from today's S/2.97).
Another currency likely to improve rapidly is the Chilean Peso (CLP) as copper prices rebound and the country gets back toward a 5% growth rate. Most economists in Chile have forecast an exchange rate of around 500 to the dollar at year's end, and that seems perfectly logical to me. A good vehicle to play this bounce would be ECH, the Chilean ETF available on the NYSE. It's a very misunderstood ETF (from nearly all literature I've seen written on it in English), because contrary to most people's perception it's much more a play on Chile's currency than on its stock market. I fully expect ECH to gain around 20% from here and end the year in the U$48 to U$50 range.
Anyway, I digress. The point of this post was to show that locals are pretty astute at the currency exchange game down here. All last week the foreign tide of dollars went into ebb mode and money was sucked away from the region (mainly Brazil). Locals saw their chance and cashed in on the strong dollar exchange rate. I'd now expect the smart ones among them to buy back those dollars in ten percent's time.