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Recovery in LATAM sentiment

In our Monthly Insights for July 2024 we noted that the iShares LTAM ETF had sold off sharply on the back of the Mexican election, but we were looking for buyers to step up on a medium term view. The ETF is USD based, so the selloff in the MXN and Mexican shares were a double whammy for the ETF in June. The strong USD vs. the BRL was also hitting the ETF, given that the combined weights of Mexican and Brazilian shares is near 80% in the ETF.

 

How much is the currency impact? The main Brazilian stock index was down around -7.6% year-to-date at the end of June, the Mexican share index was down -8.6% year-to-date. The ETF was down over -17% year-to-date – proving that currency matters!

 

Things are starting to turn around though. We look at charts to help gauge investor sentiment and behaviour. Chart analysis can be derided as a self-fulfilling prophecy though. This is not really the case as one chartists bull flag may be another chartists potential topping pattern. Self-fulfilling prophecies are better defined by the news that Cypress Hill have indeed booked the London Symphony Orchestra to play with them, as the Simpsons strikes again! 

 

Back to the markets and the chart below (daily chart with 20/60/250-day moving averages) shows USD/MXN with the USD losing some key ground recently as 18 has been lost. Watch to see if this area and then the 20-day moving average near 18.20 offer resistance to USD gains in the near term, with a slide to 17.50/17.25 (60/250-day moving average levels) expected. A move to 16.40 (near the USD lows of the year) could follow if sentiment really improves sharply.

 

 

The BRL has also firmed vs. the USD over the last few weeks (daily chart with 20/60/250-day moving averages below). The USD slide from 5.70 to near 5.40 has broken the 20-day moving average, and further BRL gains to the 60-day moving average (5.28) and then the 250-day moving average (near 5) could follow. Odds are that the local currency pullbacks vs. the USD are pricing in a bit of Fed rate cut hopes. Watch inflation readings and the Fed meeting at the end of July to see if the Fed leaves the door open for a rate cut (or two) this year.


 

The monthly chart below shows the iShares LTAM ETF (other ETF’s that track LATAM equities are available). The ETF broke rising line support during the June sell off, but is bouncing back above it now. The gain in the ETF price has seen the 60-month average regained as well, and a pullback to the 12-month average near 1,300p and then the falling resistance line near 1,450p could attract. Much depends on the June 2024 low holding up on dips ahead of the 1,000p support area. On a long-term view a test of the 1,530p area 2019 peak is still expected, which should set up hopes for a rally to the 2011 peak above 1,900p. Early days for that hope though! Keep watching the currencies as a gauge on sentiment in these markets though…


 

Gerry Celaya, Chief Strategist

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