LatAm FX hit by dollar movements

On Wednesday, the majority of the main currencies in Latin America increased before reversing course as the U.S. dollar rose on indications from the U.S. Federal Reserve that it would continue raising interest rates. The Fed increased interest rates by 75 basis points for the fourth time in a row, which initially caused the dollar to decline. However, the Fed also hinted that future increases may be scaled back to reflect the “cumulative tightening of monetary policy” it has already implemented.

Fed Chair Jerome Powell stated that it was “very premature” to consider stopping rate hikes, which caused the dollar to retrace its trend. Investors had hoped that the U.S. central bank would hint at a potential reduction of rate hikes at its December meeting but had generally anticipated a 75-bps rate increase.

The Mexican peso and Chilean peso both rose by as much as 1 percent before falling as a result of the dollar’s movements in Latin America. Positive news from China, the largest importer of industrial metals and raw materials into Latin America, also helped the mood in the early session.

Chinese decision-makers affirmed that growth remained a top goal and that they would continue with reforms, bolstering expectations that Beijing may relax its stringent COVID-19 regulations. Gains in the Chilean peso were also attributed to the central bank’s decision to maintain the benchmark interest rate at 11.25 percent during its sessions in December and January.

According to a different assessment, Chile saw its first decline in economic activity since the COVID-19 pandemic-related economic recovery in February 2021. UBS analysts pointed out that by hiking domestic interest rates, emerging market central banks can reduce Fed-induced fund flows into the United States, preserving the value of their home currencies and avoiding inflationary spillovers.

In anticipation of the country’s central bank meeting the following week, analysts have increased their inflation projections for Mexico for 2022 and their growth estimates while decreasing the latter for 2023.

The sol in Peru increased by about 1% as the head of the central bank predicted that when living costs begin to slow, annualised inflation will revert to the goal range of 1% to 3% “by the end of next year,” Due to public holidays, both the financial markets in Mexico and Brazil were closed.