In addition to their higher interest rates, Brazil and Mexico benefitted from being relatively safe markets to invest in during the uncertain global environment since the war in Ukraine and the resulting energy crisis in Europe and attracted capital flows that moved out of Russia. Carry trade would have implied that the traders borrowed money in the low-yielding US dollar and invested in the higher returning Brazilian real and Mexican peso, and this resulting higher demand for the real and peso may have helped to push these currencies higher in the first quarter.Ĭapital inflows into the Brazilian financial market following Russia's exclusion from equity indices The interest rate differentials between these two Latin American markets and the US have remained substantial since then, although the Fed caught up very quickly in 2022, providing investors with an attractive opportunity for carry trades. In face of the price pressures last year, the Brazilian central bank initiated its first interest rate hike in March 2021 to fight the higher inflation - followed by The Bank of Mexico in June - a year earlier than the US Fed, which didn't react until March 2022, as Chart 4 shows. So, the combined effect of stable export in barrels, and surging oil prices, resulted in an upward swing in total values of Mexico's oil exports and thus the currency value of peso.Ĭentral banks in Brazil and Mexico tightened monetary policies much earlier than the US Fed Mexico's average export of petroleum products and crude oil was 960 thousand Barrel/Day in the first eight months of 2022 (dragged by the cut in January), only a modest reduction from the average 1.02 million in 2021 (Refinitiv). Meanwhile in Mexico, higher energy prices led the government to reverse its plan to phase out crude oil exports (the plan was to reduce daily exports by more than half in 2022 and eventually end oil exports by 2023) in order to achieve self-sufficiency in the domestic fuel market instead of importing expensive refined products from US refineries.
Also, Chart 3 shows the positive correlation between commodity prices and Brazilian Real-USD exchange rate in recent years. Total exports of Brazil broadly increased in 2022, as Chart 2 shows, driven by the growth in crude oil and soybeans. Surging commodity prices helped net commodity exporters like Brazilīrazilian real has benefitted from its strong exports earlier this year, thanks to the strong demand and higher commodity prices, e.g., price rises in crude oil and agricultural products, amid the global supply disruptions since the Russian-Ukraine conflict started.
#DOLLARTO PESO DRIVERS#
But what factors could have been the drivers of the stronger real and peso in 2022? Perhaps the discussion could start with reasons related to the strong export performance benefiting from higher commodity prices, widening interest rate differentials due to their central banks being ahead in monetary tightening for inflation control, and the changes in capital flow following the Russia-Ukraine conflict.
The outperformance of these two currencies may seem modest in absolute terms, but it is pronounced in the context of a strengthening US dollar, particularly so since April: The US Dollar Index ( DXY ), a measure of the value of the USD against a basket of US trade partners' currencies, is up by 16.8% by the end of the third quarter, despite some criticisms that the content of the currency basket is due to be replaced to represent major US trading partners. Even in Q3, which saw a brutal sell-off in almost all currencies except the dollar, peso and real have managed the smallest losses of 0.2-2.9% (Chart 1).
By the end of Q3 this year, Brazilian real and Mexican peso have gained 2.9% and 1.7% relative to the US dollar, respectively, both helped by the rally in Q1. Vitoria Holdings LLC/iStock via Getty Imagesīy Indrani De, CFA, PRM, and Zhaoyi Yang, FRM, Global Investment Researchīrazilian real and Mexican peso are the only major currencies that have outperformed the strong US dollar YTD September 30, 2022.
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