Inter-Americas divide
With Christmas Eve now upon us, markets will be expecting a quieter day than they received four years ago. On this day in 2020, having locked down the UK and ‘cancelled Christmas’, Boris Johnson announced the completion of a post-Brexit trade deal with just a handful of days until the end of the transition period. As much as incoming President Trump may be trying to keep markets on their toes with revolutionary foreign policies and cabinet picks, expect a more typical Christmas eve in markets today.
With the financial world fixated with the battle between the Fed’s easing cycle and European economic malaise, it would have been easy to overlook the building monetary chasm opening amongst South American nations. A growing divide is observed between South American nations and when observing these outlying nations against the trends present across Central and North America. As a result of unsustainable fiscal policies, Brazil’s currency, the Real, has been under significant pressure. In an attempt to abate the sell-off in BRL, the central bank (BCB) announced a 100-basis point (1%) hike in benchmark rates earlier this month, promising similar moves in 2025.
The central bank of Uruguay joined Brazil in bucking the global/regional trend of cutting rates and defied analysts’ expectations, delivering a quarter-point hike yesterday. Both nations have cited current inflationary risks and rising inflation rate expectations incommensurate with their easing cycle. Despite such moves and hefty FX auctions, Brazil has failed to stabilise its currency and will likely continue to fail until such time as a viable plan for fiscal consolidation is delivered. Based upon the forthcoming election in 2026, this seems like an unlikely outcome. Combined with headwinds facing the Brazilian economy created by the forthcoming Trump administration’s stance towards China (not to mention the risk of direct sanctions targeted towards Brazil), BRL is likely to stay on the back foot.
Discussion and Analysis by Charles Porter
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