• R&D
  • Posts
  • 3 Things Daily - Insights Into Latam Currencies

3 Things Daily - Insights Into Latam Currencies

In today's newsletter, we feature an exclusive interview with our FX Risk Management team, providing insights into what to anticipate from currencies in the LATAM region.

Author

Marketing Team
January 19, 2024

Hi there,

In today's newsletter, we feature an exclusive interview with our FX Risk Management team, providing insights into what to anticipate from currencies in the LATAM region.

Matheus Zani & Daniel Porto

R&D Featured Article

FX Options 101: How to buy and sell FX options safely

Currencies

The FX market is dominated by forward contracts, comprising 90% of transactions, while options offer a more flexible approach to hedging currency risk. Options, though involving upfront premiums, limit potential losses and allow for intricate strategies like collars and participating forwards. Choosing between options and forwards depends on factors such as liquidity and technical capabilities. Platforms like Deaglo use technology and simulations to help users select suitable options. AI and ML enhance options by simulating realistic market environments and adapting to different risk regimes. Deaglo's platform implements ML models to provide a comprehensive view of risk profiles in various market conditions.

1. With Latam FX undergoing some losses recently, does Deaglo see more downside in the future?

The probability of this occurrence is high, primarily attributed to four key external factors:

Interest Rate Cuts in the US: The reduction in interest rates in the US may facilitate a soft landing for the country, leading to a narrative shift favoring a stronger USD. This stands in contrast to other economies experiencing slower growth, while the USD maintains relatively high yields.

Geopolitical Conflicts: The global economic landscape is further complicated by ongoing geopolitical conflicts and tensions.

Record-breaking Voter Turnout: A record-breaking year for voter turnout in over 70 countries, including the US, India, Taiwan, and others, is expected to impact fiscal forecasts. The election outcomes could have far-reaching implications for international trade, green policy, immigration policies, and geopolitical dynamics.

Persistent Sluggish Growth in China: China's persistent sluggish growth is anticipated to contribute to a delay in global recovery.

Taken together, these four drivers significantly add complexity to the global economic outlook. In addition to these external factors, domestic components within each country play a crucial role. Notably, for Brazil, Colombia, and Chile, the weather phenomenon El Niño emerges as a particularly interesting domestic factor. El Niño has the potential to generate an inflationary impact, especially on volatile food items, making it a significant threat in these regions.

2. As expectations for Fed rate cuts have recently undergone a correction, is Deaglo observing a shift in the stance of Latam central banks?

In the past two days, we observed data from the US reinforcing the perception that the country is faring well rather than experiencing a global soft landing. Recent releases indicate better-than-expected increases in retail sales, industrial production, the housing market index, and initial job claims.

The trajectory of events moving forward will hinge significantly on the effective control of inflation, both in LATAM and globally. If the Fed finds it necessary to raise rates, resulting in an increase in US interest rates, it could introduce instability in Latin American currencies, potentially disrupting the efforts of central banks to uphold their easing policies. In specific scenarios, these central banks might need to consider raising rates to safeguard the stability of their currencies.

3. Deaglo's perspective on the impact of rate cuts by the Fed and other central banks on carry trade in Latam FX is as follows:

Despite anticipated rate cuts by the Fed and LATAM central banks in 2024, the attractiveness of carry trade is expected to persist due to substantial interest rate differentials. However, participating in this carry trade is poised to become riskier in light of the challenging external environment. The aforementioned fundamentals are likely to introduce increased volatility to the FX market in the coming months.

Charted Territory

What to look out for today

GBP - Retail Sales (Dec)
CAD - Retail Sales (Nov)
USD - Atlanta Fed GDPNow (Q4)

Did you miss our latest insights?

Featured Podcast Episode

Episode 7: Jonny Boyarsky of Literally Helping Startups and Athenian Capital sits down to talk about startups, investing, and AI.

Listen to Raise and Deploy:

BONUS: If you’d like to receive our daily round-up of the three must-know global headlines affecting international currencies, sign up for Raise and Deploy: The International Investing Newsletter!