Argentina devalues as Lat Am markets routed again

Latin America’s financial markets have been among the hardest hit in the storm that has swept through the emerging world since the start of the year. The attention has focused on Argentina, where the authorities have bowed to the inevitable and devalued the peso by more than 20% against the US dollar in the face of growing strains in the balance of payments. But currencies in Brazil, Mexico, Chile and Colombia have also fallen by nearly 5% against the dollar since the start of the year. All of this has raised the prospect that policymakers across the region could start to raise interest rates in order to defend their exchange rates. For now, we think it is more likely that the authorities in most countries will use their large buffers of foreign exchange reserves to prevent currencies from weakening sharply. But the recent market turmoil has strengthened the case for further rate hikes in Brazil. And central banks in Chile, Peru and possibly Colombia would be the most likely to follow suit if the market sell-off escalates.