Major Latin American currencies strengthened significantly in the first three months of the year amid a spike in commodity prices and rising inflation rates.
Currencies from Brazil, Peru and Chile saw the greatest improvements in a basket of emerging market currencies across the globe, data collected by S&P Global Market Intelligence shows. The Brazilian real was the best-performing currency year-to-date, appreciating 17% through April 4. The Peruvian sol followed with an improvement of more than 9%. The Chilean and Colombian pesos both strengthened as much as 8.8% against the dollar, while the Mexican peso improved 3.7%.
The disruption in the supply of commodities and subsequent increase in prices following the Russian invasion of Ukraine paved the way for increased food and energy prices that benefit Latin American countries. Greater inflation, which has resulted in rate hikes from regional central banks, has also led to inflows. Currencies are gaining steam even as Latin American economies face political uncertainty, with Brazil and Colombia facing presidential elections, Peru in political turmoil, and Chile working to rewrite the constitution.
"Currencies in the region have shown resilience amid the crisis in Ukraine," a report from Japanese investment bank Mizuho said. "Looking ahead, higher international commodity prices, notably crude oil and grains such as wheat and corn, are expected to keep inflation high for longer across Latin America, leading central banks to extend their tightening cycle."
Central banks in the region increased interest rates significantly and aggressively, decisions that likely contributed to greater interest in Latin American assets. Banco Central do Brasil, in particular, has hiked rates repeatedly over the past few quarters, taking the Selic monetary rate from a record low of 2% to 11.75%.
Argentina's peso was the exception in the region as its official exchange rate is administered by the government. The peso depreciated more than 8.6%.
The strong currencies have helped credit-default swaps remain stable amid global upheaval.
