Brazil, Chile and Colombia are the most affected by the fall in commodities

After a rally fueled by the steep rise in commodities, Latin America is now suffering the biggest asset price correction among emerging markets, feeling more of the Chinese slowdown in a scenario already delicate by global monetary tightening and local political uncertainties, analysts said.

Many countries in the region are net exporters of raw materials and, as a result, were boosted by the sharp rise in commodity prices as a result of the Ukrainian War, which began at the end of February.

But over the past several weeks, raw materials have been on a downward path as demand fears have mounted in the face of heightened risks of a global recession. The depreciation of this asset class has put pressure on the so-called terms of trade — the ratio between export and import prices —, suggesting a decline in the flow of dollars.

The lower money supply is worsened by the rising cost of the dollar, as the United States raises interest rates significantly and continuously.

In addition, China resorted to new lockdowns to contain outbreaks of Covid-19, which further clouded the scenario for the world’s second largest economy, the main buyer of inputs sold by Latin America.

“Our view is that a global recession should mean that Latin America is likely to continue to underperform,” said Claudio Irigoyen and Christian Gonzalez Rojas of Bank of America.

“As such, it is not surprising that (the currencies of) countries with high exposure to the supply factor of commodities — namely Chile, Colombia and Brazil — have experienced the most significant losses, even with a significant volatility-adjusted return,” they added.

In July alone, the dollar rose 7.5% against the Colombian peso, 5.1% against the real and 3.8% against the Chilean peso. The currencies of Colombia and Chile have fallen to record lows recently, and the real is at its lowest in six months.

Since the end of May, when commodities began to fall, the declines in Latin American currencies and equities have been even more pronounced.

For strategists at French bank Société Générale, the depreciation of regional currencies should not stop, at least in the short term, even after the currencies of Chile, Colombia and Brazil recorded the worst performances in recent months.

“As China struggles to regain a stronger economic base, the currencies of commodity importers are likely to outperform those of commodity exporters,” experts say.

Goldman Sachs points out that much of the currency devaluation is the result of liquidations in the prices of copper and oil, among other important raw materials, amid a scenario of broad dollar strength.

Analysts assessed that Latin American central banks may have to resort to tools other than interest rates to defend their currencies and cited the Chilean Central Bank’s exchange rate intervention program worth US$25 billion (R$135.3 billion).

“We do not rule out that other regional central banks may also eventually announce foreign exchange market intervention programs if their respective currencies continue to fall and deviate further from the vector of macroeconomic fundamentals.”