Our key FX forecasts for Latin American economies

Our key FX forecasts for Latin American economies

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Latin America currencies had an eventful 2023. Some, such as Argentina’s peso and Venezuela’s bolívar, crumbled amid hyperinflation and elevated money printing, while others, such as the Mexican and Colombian pesos, strengthened significantly. Our panelists’ forecasts suggest that 2024 will maintain this pattern of extreme divergence between currencies.

Latin American currencies to depreciate in general:

Our panelists expect virtually all Latin American currencies to depreciate this year compared to the U.S. dollar. This is because interest rates in the region are forecast to fall far more quickly than in the U.S., narrowing the positive interest rate differential that Latin America currently enjoys vis-à-vis the U.S. and thus weighing on currencies. For instance, our Consensus is for the central bank’s policy rate to fall by around 200 basis points in Mexico and close to 500 basis points in Colombia in 2024, compared to our expectations of around 100 basis points of cuts by the U.S. Fed. 

Argentina and Venezuela to see extreme currency weakening:

Argentina’s peso and Venezuela’s bolívar are projected to continue their sharp descent in 2024. Our Consensus is for both currencies to lose over half their value over the course of the year, due to limited investor confidence, informal dollarization and triple-digit inflation. Our panelists expect the Argentinian peso to end 2024 at ARS 1,700 per USD, compared to just ARS 808 per USD at the end of 2023, and for Venezuela’s bolívar to slip from VEF 36 per USD to VEF 93 per USD. 

Chile’s peso to strengthen:

Chile is the only major Latin American economy whose currency is projected to gain ground this year—albeit marginally. The apparent end of the drawn-out process to reform the country’s constitution following December’s referendum should boost investor confidence and support demand for the peso, which will also benefit from foreign interest in the country’s renewable energy and mining sectors. 

Long-term exchange rate forecasts for Latin America:

Beyond 2024, our Consensus is for Latin American currencies to depreciate on the whole against the U.S. dollar. A similar combination of factors to past years will be at play: Persistent current account deficits, political uncertainty, soft growth prospects and higher inflation than in the U.S.  

Insight from our analysts:

On Argentina’s peso depreciation and its impact on other variables, Itaú Unibanco analysts said:

“We now expect a nominal exchange rate of ARS2000/USD by YE24, from ARS1,550/USD in our previous scenario mostly due to a higher-than expected devaluation of the currency in December 2023. We revised our inflation forecast for 2024 up to 200%, from 150% before (with a likely peak in the first half of 2024), reflecting the pass-through effect of the recent devaluation of the currency and the correction of energy, transport, and fuel tariffs, among others. We estimate a GDP contraction of 2.5% in 2024, unchanged from our previous scenario.”

On prospects for Chile’s peso, EIU analysts said:

“The Chilean peso has appreciated in recent weeks after the BCCh stopped its reserves accumulation programme prematurely and as disinflation in the US is easing uncertainty surrounding US monetary policy. The Ministry of Finance’s programme to purchase US$2bn every month between August and December to support the peso also appears to be working. We expect the currency to rally in early 2024 after the end of the constitutional reform process. The currency is then likely to strengthen gradually in real exchange-rate terms over the medium term, assuming that policy uncertainty abates. Firm copper and lithium prices (driven by high demand for base metals related to global investments in battery production) will also prove supportive.”

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