Most Latin American currencies took a hit when Donald Trump was elected president of the US last Wednesday (November 9), prompting fears for a region that was already economically volatile.
As in many other areas, Trump’s views on monetary policy changed a few times during his campaign, but most recently he criticised Federal Reserve chair Janet Yellen for maintaining low interest rates in order to create a “false” economy. This has led commentators to predict changes within the Fed’s board, and consequently in its policy.
The shock result created a sense of urgency in Latin America, which is still the world’s most dollar-dependent region despite efforts to move towards de-dollarisation in recent decades. In the streets of Buenos Aires for example, illegal exchange bureaux abound, and Argentines tend to store their cash in pesos at home until there’s enough of it to make a US dollar deposit with their banks.
Following the election result, the Mexican peso was the hardest hit, falling by 14% against the dollar, mostly based on fears that the president elect will renegotiate the North American Free Trade Agreement (NAFTA) and limit Mexican imports. Arnulfo Rodriguez, senior economist at BBVA Bancomer in Mexico City, believes these fears are partly unfounded.
“We think NAFTA is probably going to be renegotiated but we don’t think that the main manufacturing sectors in Mexico such as automobile and electronics will be hit by tariffs because the global value chain is too important to the US manufacturing sector. We expect US companies to lobby to counteract damaging NAFTA renegotiation,” he tells GTR.
However, he expects the Mexican central bank to continue hiking interest rates to keep the inflation spurred by the currency’s depreciation in check. Mexico’s revenue could also be affected by Trump’s promise that he would limit foreign remittances, the country’s largest source of foreign currency after foreign direct investment (FDI).
Talking about FDI, Rodriguez also believes investment flows into Mexico will be affected by Trump’s protectionist policies – after all, one of the most attractive aspects of doing business in the country is its proximity and ease of access to the US market. “Investment in Mexico has been taking a toll, and we expect it to go down again in Q1 of next year based on the Trump uncertainty,” he adds.
Other economies will also feel the negative impact of higher US dollar interest rates: Colombia has already experienced one of the largest currency depreciations in the world in the past year, and the peso went down another almost 3% the day after the election.
“In Colombia we have very good trade with the US, and protectionist measures could affect that,” says Jorge Andrés Jimenez Carcamo, commercial manager at trade credit insurance firm Solunion.
“Here we mainly export commodity products so in our case it probably wouldn’t have the same impact as it can have in Mexico with manufacturing. Companies in the textile, chemicals and construction industries, for example, will be more affected – those who sell more elaborate, value-added products. The rest of the economies, for example Chile and Peru, are closer to Asia right now, so won’t be as affected,” he tells GTR.
Boon for metal producers
In Brazil, the central bank has already taken measures to calm markets after the real depreciated by 5.7% on November 10: it paused its daily auctions of reverse currency swaps, and the Treasury offered to repurchase real-denominated federal bonds and halted the auction of new bonds this week.
Octavio de Barros, director and chief economist at Banco Bradesco, explains to GTR: “There is volatility based on perception that Fed monetary policy will change, causing rising inflation, but the Brazilian Central Bank has taken measures to stabilise the currency. This has shown the importance of speeding up the reform process [including a proposed cap on government spending for the next 20 years] to stabilise the economy.”
However, for countries that are not dependent enough on US trade to be affected by protectionist policies, or those who depend on US trade but mostly in terms of commodities, there is a silver lining. Trump’s promise to limit Chinese imports at the same time as he plans to increase infrastructure spending has sent metal prices on an upward trajectory.
On November 13, copper prices on the London Metal Exchange had gone up 8.7% since the election result, while aluminum and zinc were up 2.7% and 2.4% respectively. Iron ore prices have been on somewhat of a rollercoaster, going up no less than 24% upon the news of Trump’s win, then tumbling down 6.5% overnight yesterday (November 17), but remain at several-year highs.
We have already seen the prices of most of the base metals rallying: lead, zinc, nickel – copper is still behind but I believe it will continue to catch up with the rest. Unnamed commodity trader
This is great news for Chile (the world’s top copper exporter), Brazil (the world’s second-largest exporter of iron ore) and Peru (among the top exporters of copper and zinc) in particular.
It’s also a boon for the region’s commodity trading houses, which thrive on volatility. “Traders make money when they have volatility in the market and that is what any election brings, especially this one with such an unexpected outcome,” one commodity trader tells GTR on conditions of anonymity.
“For LatAm, the effect will be good I believe, especially for the metal-producing countries because Trump mentioned that he will rebuild America and embark on an expansionary fiscal policy. We have already seen the prices of most of the base metals rallying: lead, zinc, nickel – copper is still behind but I believe it will continue to catch up with the rest.”
The trader says it is also worth looking at the movement in gold and silver prices since the election: these are usually used as safe havens when there is uncertainty, and prices increased on the back of Trump’s victory. “The effect is unpredictable but it will definitely contribute positively to the countries that produce gold and silver – Peru, Mexico, Chile and Bolivia in particular,” he says.
Of course, in commodity-dependent countries, price volatility equals currency volatility, which will add to the Fed policy-induced uncertainty.