Thursday, November 24, 2011

Contagion hits Latin America

Contagion comes in many forms. As developed economies faced slower growth, the natural movement of capital was toward emerging economies, where growth is expected to remain robust. But the crisis in Europe is spreading, leaving very few markets unscathed. China is facing a slowdown (more on that later). Capital is starting to flow out of resource rich nations of Latin America. The current view now is that these nations will be facing a slowdown. Brazil is now fully expected to lower rates.
Reuters: All of 32 analysts polled by Reuters expect Brazil's central bank to cut its benchmark interest rate by 50 basis points to 11 percent next week.";

"Today's fall (in the real) may also be driven by an increase in bets on rate cuts in Brazil," Shearing added.

Lower benchmark interest rates can sap some demand for emerging market assets. Brazilian policy-makers expect the local economy to be hit by the deepening crisis in Europe and slower growth in China, Brazil's top trading partner.
Indeed the first sign of capital outflows is the move in foreign exchange levels. The real is approaching new recent lows.  The last time these levels were reached was back in the "dark days" of Sep-2011, when the "double dip" recession in the US was thought to be a certainty.

BRL (Bloomberg)

Mexico is feeling the outflows as well.  The peso is now at levels not seen since 2009.

 MXN (Bloomberg)

For those who remember 1997-98, will recollect just how rapid and violent contagion can become. Many emerging market nations' economies are healthier than ever to withstand a global recession (should one take place), but nevertheless these currency indicators need to be monitored for signs of increased risks.
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