Has the LatAm FX rally gone beyond its fundamentals?

Latin American currencies have been appreciating against the dollar in 2025, driven by dollar weakness and rising commodity prices, despite trade uncertainties. In this note, we explore which currencies in Latin America are overvalued and undervalued. Utilizing models such as the Behavioral Equilibrium of Exchange Rate (BEER) and Purchasing Power Parity (PPP), we assess the fair value of the currencies, indicating potential corrections in areas where exchange rates may not align with underlying economic fundamentals. The Argentine peso (ARS) appears overvalued, with the BEER model indicating an 18% overvaluation, The Mexican peso (MXN) is also seen as expensive, influenced by crowded long positions. The Peruvian sol (PEN) is above fair value, driven by commodity price impacts. The Colombian peso (COP) is near fair value, while the Brazilian real (BRL) remains undervalued despite recent gains. The Chilean peso is close to fair value, with potential for moderation in pro-market policies affecting its outlook.