World’s Least Favored Currencies Suddenly Became Global Leaders

(Bloomberg) -- Latin American currencies have staged a rebound since mid-May on fledgling signs of renewed global growth and as central banks pour liquidity into the system. Technical barriers to further gains are few and far between.

Brazil's real has rallied almost 17% since May 15, while the Mexican peso is up more than 11% -- the biggest gains among 24 emerging-market currencies tracked by Bloomberg. Those two currencies had previously led losses, sinking 31% and 21% respectively this year through mid-May.

A general easing of volatility and gains in emerging-market assets worldwide have help lift Latin American currencies. But there are also idiosyncratic factors in play. The return of the carry trade in Mexico, subsiding political tensions in Brazil and higher copper prices for Chile and Peru also contributed significantly. Such is the new risk appetite that investors are turning a blind eye to the pandemic, even as Latin America now accounts for 40% of the coronavirus deaths worldwide.

“The market seems to be shrugging all bad news off,” said Delphine Arrighi, a London-based portfolio manager at Merian Global Investors. The rally is the result of abundant liquidity offered by central banks, cheap valuations and some lockdowns being lifted, even as political risks flare up, she added.

The Chilean peso strengthened past its 100-day moving average on May 20 and surged through the 200-day average in less than two weeks, reaching overbought territory based on the relative strength index and down only 2% this year. Colombia's peso is now overbought as well, after trimming 2020 losses to about 8%.

The Mexican peso also strengthened past its 100-day moving average on Tuesday with about 5% to go before reaching the next key resistance at the 200-day average. The Brazilian real is more than 2% away from its 100-DMA and a breach could pave the way for another 9% rally before hitting the 200-DMA.

“Eventually we will begin to see some profit-taking and investors will pay attention to details again,” said Merian's Arrighi. “But we are probably not quite there yet.”