Commodity Super Cycle? Ask Latin America!
In August, we forecast a marked rise in global inflation, but warned that the risks would be in Producer Inflation, more than in Consumer Inflation; those risks have now increased. Markets will wait for evidence of a manufacturing slowdown in the PMIs of developed economies, which have continued to rise, but in Emerging Markets, PMIs in 2021 haven’t recovered to their peak of 2020; indeed, the trend has definitely turned lower, and it wouldn’t take much for them to become negative.
In mid-May, we forecast a correction in commodity prices, and although oil prices have remained strong, supported by supply restrictions, the subsequent correction in commodities may have already started to have a detrimental impact on producers, particularly in South/Latin America, and this adds geopolitical and political risks.
For most Latin American countries, commodities exports represent between 66% and 97% of all international sales; in Mexico, however, they only account for 26%.
In 2020, global food inflation increased to 6.3%, from 4.6% in 2019, while in May 2021 world food prices increased by 4.8% mom, the biggest monthly rise since October 2010 and 39.7% higher than May 2020. China’s recovery has increased demand for grains and soybeans, and the heatwave in California is likely to increase price pressures.
Markets may have become too complacent over Emerging Market currency price moves. During the period of the Dollar rising globally with the Fed raising rates between 2017 and 2018, implied Forex Volatility fell across every major Latin American economy. In 2020, the Latin American market reaction to the rise in US yields was in local rates, because of individual, idiosyncratic factors, moving currencies further than a general move in the Dollar.
In our May 20, 2020, report we saw value in selling USDMXN at 23.75, targeting 20.00. The move to this level was slow, and not reached until December, and even six months later is only trading just under 20.00.
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