By Win Thin

NEW YORK ( TheStreet) -- Following is our outlook for Latin American central banks and how it should affect their respective currencies.


Chile's central bank meets July 15 and is expected to continue its tightening cycle with a 50-basis-point hike from the current 1.0%.

The bank started the cycle in June with a 50-basis-point hike, and it has been more upbeat lately about the economic outlook.

The market is looking for a year-end rate of 3.0%, or 250 basis points of total tightening this year, and economic data continue to strengthen.

Chile's economic activity index, which is known as IMACEC, jumped a stronger-than-expected 7.1% year over year in May, and second-quarter GDP growth of more than 6% year over year is likely.

Price pressures are low but accelerating, so preemptive tightening is likely to continue in the second half of the year. The Chilean peso (CLP) is the worst Latin American currency year to date, falling 6% vs. the dollar (USD) despite having what we view as strong fundamentals.

The Chilean peso has the potential to play catch-up if risk appetite continues to rise. Levels to watch are 528, 521, and 513 (major retracement levels of the 2010 rise in USD/CLP).


Colombia's central bank meets July 23 and is expected to keep rates steady at 3.0%. However, the economy is gaining momentum, so the tightening cycle is likely to start by the fourth quarter, with markets looking for 75 basis points of tightening then to take the year-end rate to 3.75%.

Colombia's CPI rose 2.3% year over year in June, while PPI is back to rising year over year after spending much of the fourth and first quarters in negative territory. Domestic consumption is picking up, and more importantly, the Venezuelan trade embargo has not had a terrible impact on exports.

Political risk has been minimized with the election of former Defense Minister Juan Manuel Santos as president.

The dollar/Colombian peso currency pair (USD/COP) made new 2010 lows this week. The Colombian peso is the top Latin American currency so far this year and is up 8% vs. the greenback. COP strength is likely to continue near term, and big levels to watch for ahead are 1812 (October 2009 low) followed by 1637 (June 2008 low).

For now, policymakers have been quiet about peso strength, but don't forget that there were official complaints back in October 2009, right around the time that Brazil reintroduced the IOF tax. Expect markets to get nervous again on the approach of 1812.


Mexico's central bank meets July 16 and is expected to keep rates steady at 4.5%. We have identified the Mexican peso (MXN) and Canadian dollar (CAD) as two currencies that are likely to suffer disproportionately from the recent U.S. double-dip fears, and that appears to be holding up.

CAD is the worst G10 performer so far in the third quarter, while MXN is the worst emerging-market performer so far in the quarter. The Mexican economy is recovering, but it is clearly lagging many of its regional counterparts.

The peso underperformed most of 2009, outperformed in the fourth quarter of 2009 and the first quarter of 2010 and then went back to underperforming in the second quarter and so far in the third quarter.

We think underperformance will continue. Although MXN offers decent yields, the growth and fundamental backdrop is not as compelling as in other regional economies. Furthermore, the yield trajectory is not so good, with local analysts pegging March 2011 as the likely start of the tightening cycle.


Peru's central bank meets July 8, and is expected to hike rates by 25 basis points to 2%. We note that analysts are looking for a year-end policy rate of 3.0%.

Economic data have come in quite strong in recent weeks and point to second-quarter growth close to 10% year over year.

Inflation is accelerating, with financial minister Mercedes Aráoz Fernández saying it will likely move up to 2.5%-3.0% this year. The financial ministers said the government will tighten fiscal policy by cutting planned spending by $985 million this year.

Despite the positive economic backdrop, the authorities remain concerned about currency strength. The central bank has continued to intervene to prevent nuevo sol (PEN) strength and got particularly aggressive this past week around the 2.8250 area, the year's low for USD/PEN.

Although we like Peru fundamentals, the scope for PEN appreciation appears limited even as interest rates are not quite high enough to be attractive yet. Not when Brazil is offering almost 10 percentage points more.

To summarize our Latin American currency outlook, we like the Brazilian real (BRL), CLP, and COP over MXN and PEN.
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