Foreign exchange rates are driven by several factors, such as inflation, interest rates and relative demand for the currency. With the exception of the Brazilian Real, the fluctuations of most Latam currencies are highly dependent on the US Dollar since the United States is generally their largest trade partner. While Latam exchange rates are usually compared against the US Dollar, comparing versus other Latam currencies reveals an interesting view.
The Peruvian Central Bank releases a monthly relative real exchange rate of the Peruvian Nuevo Sol (PEN) versus other major Latam currencies. The data, indexed to 2009, is based on average exchange rates and consumer price indices reported to the International Monetary Fund. Values above 100 imply the foreign currency gained purchasing power relative to the PEN since 2009, while values below 100 imply the opposite. The graph shows how the PEN gained strength relative to all major Latam currencies after the strong economic growth in Peru from 2011 to 2012.
The PEN gained significant purchasing power versus the Mexican Peso (MXN) and the Brazilian Real (BRL). The same is true to a lesser degree for the Colombian Peso (COP) and Chilean Peso (CLP), which have stabilized over the recent months after Colombia and Chile posted strong economic growth rates as well. While it may seem counter-intuitive that the MXN is gaining strength, given the recent macroeconomic data points pointing to a Mexican slowdown, it is important to keep in mind that the MXN is closely linked to the optimistic expectations of the performance of the US economy. It is likely that for the same reason the Mexican stock exchange index increased over 10% since July 2012, reflected in the 15% rally in iShares MSCI Mexico Index Fund (EWW) since July 2012.
The Peruvian exchange rate has steadily appreciated over the past 2 years, reducing the threat of investor losses due to foreign exchange depreciation. Additionally, the Peruvian Central Bank stated last December that it expects the economy to grow 6.3% in 2013, which would likely place it once again among the fastest growing Latam economies. Investors in iShares MSCI All Peru Capped Index Fund (EPU) are likely to benefit from continued growth in the the Peruvian economy. Investors in other Latam ETFs such as iShares Latin America 40 Index Fund (ILF) or SPDR S&P Emerging Latin America ETF (GML), may want to add more exposure to Peru as these ETFs have a Peruvian exposure of only 3%.