How the Brexit Affected Rates and Currencies in LatAm

After Brexit polls said that the referendum would end with a stay in the European Union (EU), all markets reacted as if that would be the outcome on voting day.  After the announcement that the U.K. would no longer be part of the EU, all markets were shocked, and the emerging markets of Latin America suffered consequences as well.

Exhibit 1 shows the movement on yield in bps between June 22-23, 2016, and June 23-24, 2016, in different parts of the sovereign curve for Brazil, Chile, Colombia, Mexico, and Peru.

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On average, Chile was affected the least in terms of movements in its sovereign curve.  In contrast, Peru had a significant gain in prices in the long part of its curve, but the day after the vote it returned to normal.  Brazil also saw gains before the referendum, and the day after the vote it stayed flat.  Mexico had gains in all parts of the curve on the day of the vote and the next day it closed with upward movements in the short end of the curve, following a possible hike in policy rate by the country’s central bank, there was an upward movement of 50 bps on Thursday, June 30, 2016.  Another budget cut of MXN 31,700 million was announced.

On the FX side, we have seen many movements since the vote.  Exhibit 2 shows the percentage change of the spot prices against the U.S. dollar between June 22-23, 2016, and June 23-24, 2016.

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In all cases, Thursday’s close presented an appreciation of most currencies against the U.S. dollar; Mexico’s currency benefited the most, with an appreciation of 1.14%.  However, one day later, it was the most negatively affected of the currencies in Exhibit 2, closing with a depreciation of 3.01%—at midnight local time, it was down more than 7%.

In contrast with currencies, real rates, as measured by the regional components of the S&P Global Emerging Sovereign Inflation-Linked Bond Index, had varying movements between each country.  Exhibit 3 shows the daily returns of the inflation-linked indices of each country, with Chile and Colombia flat, Mexico with positive returns on both days, and Brazil and Peru with losses on Thursday and gains on Friday.

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