Fed Lifts Capital Requirements for Banks

By Anthony Harrup 

        The prospect of higher U.S. interest rates and the decline in global commodities prices are proving to be a lethal combination for Latin American currencies, sending them to multiyear lows against the dollar.
        Mexico's peso hit an all-time low against the dollar Monday, Colombia's peso is at its weakest in more than a decade, as is the Brazilian real, while the Peruvian sol and Chilean peso are taking hits from lower metals prices.
        While the economic factors vary from country to country, most are suffering from lower global growth, loss of export revenue from falling commodities prices, and a rising dollar that is making emerging market yields less attractive to portfolio investors anticipating that the U.S. Federal Reserve will start raising interest rates soon.
        "The common thread is that all [Latin American countries] received strong investment flows because of quantitative easing in the U.S.," said Benito Berber, Latin America strategist at Nomura Securities. "Even if the U.S. tightening is gradual, the scenario is one of continued weakness for the currencies."
        Added to that is the decline in commodities prices, he added.
        Brown Brothers Harriman expects market participants to remain negatively biased toward emerging markets until the Fed actually starts raising rates.
        "We could see emerging markets get some traction late in the fourth quarter or perhaps early in 2016 if the Fed is successful in calming markets after it starts tightening," BBH said in its third-quarter outlook.
        The Mexican peso, the most traded of the emerging market currencies, sold at more than 16 to the dollar Monday for the first time, with worries about Fed tightening exacerbated by renewed declines in oil prices. The peso ended trading at 16.01 per dollar.
        Although the Bank of Mexico is widely expected to start raising interest rates as soon as the Fed does, and has been auctioning dollars to curtail volatility in the exchange market, the peso has continued to depreciate, reacting to oil prices and to positive U.S. economic data that could prompt the Fed into action.
        Unlike some of its Latin American peers, however, Mexico could benefit from a weaker currency, given that four-fifths of its exports go to the U.S., and manufactured goods account for more than 80% of total exports.
        "This is a key reason why we expect a weaker currency to be particularly beneficial to Mexico compared to other countries in the region that have seen similar currency falls but where trade ties with the U.S. are much smaller," Capital Economics economist Liam Carson said in a note.
        The weaker peso also increases the local currency value of money sent home by Mexicans living in the U.S., and cushions the impact of lower oil prices on government revenue.
        Elsewhere, the Brazilian real ended Monday a fraction under 3.20 to the dollar, and is down more than 30% from a year earlier.
        Behind the weakness are expectations that the economy will shrink as much as 2% this year, with inflation running above target at 9% and fiscal austerity measures that include phasing out subsidies that had kept inflation artificially low.
        In March, the Brazilian central bank effectively let the real float freely by ending a program of daily currency-swap auctions that had been used since 2013 to tame volatility. And unlike its regional peers, Brazil's central bank has been raising interest rates in an effort to keep inflation in check.
        On Monday, it took more than 2,700 Colombian pesos to buy a dollar, compared with around 2,200 in early December and between 1,800 and 1,900 pesos in prior years, when the country was enjoying an investment boom, especially in oil. Oil accounts for half of foreign earnings in Colombia, and the slump in crude prices has helped push the currency down.
        Chile's peso, meanwhile, slid this month to its weakest level since the global financial crisis in late 2008, and traded Monday as weak as 650 pesos to the dollar.
        The Chilean currency, which is down about 10% in the past year, often moves with the price of copper. Chile is the world's biggest producer of copper, which accounts for half of its exports, and has seen its economic growth slow sharply on a decline in Chinese demand for the metal.
        The Peruvian sol has also fallen sharply on lower demand for its top mineral exports, including copper, gold, zinc and lead. The sol has depreciated 14% in the past year to about 3.18 per dollar. The Central Reserve Bank of Peru regularly intervenes in the spot market to reduce currency volatility and ease the depreciation of the sol, and has sold over $5.3 billion, more than all of 2014.
        --Ryan Dube in Lima, Paulo Trevisani in Brasilia, and Juan Forero in Bogota contributed to this article.
        Write to Anthony Harrup at anthony.harrup@wsj.com
        (END) Dow Jones Newswires

        July 20, 2015 17:39 ET (21:39 GMT)

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