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External vulnerabilities to ease as growth weakens

The latest data suggest that current account deficits in the region’s major economies narrowed towards the end of last year, which is particularly good news for Colombia and Chile. Both were running alarmingly large shortfalls last year which helps to explain the bouts of weakness that their currencies suffered. To be clear, neither country is out of the woods yet – the Colombian peso has come under renewed pressure this month. But with growth, and demand for imports, set to weaken over the coming quarters, and commodity prices elevated, current account deficits are likely to narrow further. This should provide support for the region’s currencies; in particular, we see scope for a rebound in the Colombian peso later in the year. That said, we expect the Mexican peso to be an outlier, with its recent outperformance likely to reverse course.

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