MXN/BRL Outperformance: Temporary Reversal?

The secular appreciatory trend of the Mexican peso against the Brazilian real , in place since late 2011, could be on the verge of a near-term reversal in BRL's favour. The cross rate appears to be on the cusp of a technical break in favour of the Brazilian real , which has been a clear underperformer among Latin American currencies since the onset of the EM sell-off, which started in May. A confirmed break on the monthly chart ( see below ) would indicate that a move back to the MXN6.89-7.00/BRL area could be on the cards over the coming weeks and months, implying spot gains of some 16% in BRL's favour. In the short term, we believe that diverging interest rate expectations could support a trend reversal in the real 's favour, with the central bank still committed to preventing additional exchange rate weakness, while expectations of an additional interest rate cut in Mexico are on the rise.

That said, we have previously stated that we believethat the latest relief rally in Latin American currencies would likely be short-lived ( see ' Fed U-Turn Risks Exacerbating Q4 Correction', September 19 ). We observe that the real has so far failed to break through key technical resistance against the US dollar, while the greenback appears to be coming off major trendline supportat the time of writing. As such, while a broader outperformance of the real against the peso cannot be ruled, we believe that Mexico's superior balance of payments outlook and promising investment climate, in sharp contrast to Brazil, mean that peso outperformance over the real will continue over the long term. Indeed, ourregular readers will be familiar with our long-held preference for the Mexican peso over the Brazilian real , given the two countries' diverging macroeconomic outlooks ( see 'MXN Set To Outperform BRL In Long Run', March 8 2012 ).

Break Would Point To Temporary Trend Reversal
Exchange Rate, MXN/BRL & MACD (Monthly)

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This article is tagged to:
Sector: Country Risk
Geography: Latin America, Bolivia