By Win ThinNEW YORK ( TheStreet) -- Following is our outlook for Latin American central banks and how it should affect their respective currencies.
ChileChile'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).
ColombiaColombia'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.