The commodity component

Commodity prices remain a key factor for those trading Latin American currencies. A slowdown in global demand for Latin American commodity exports could ultimately weigh on the region’s currencies.

Huge demand for raw materials from China has in part supported the overall commodity market price surge in recent years. However, the blockbuster rally in commodities that began in early 2002 unraveled in 2006, led by a decline in energy (and to a lesser degree metals); the Reuters/Jefferies CRB Index lost some 20 percent between May 2006 and January 2007 (Figure 1). Nonetheless, the index is still trading around early-2005 levels, and well above its 2002 low.

Enrique Alvarez, head of Latin American research at Ideaglobal, agrees commodities remain a critical component of the picture.

“The risk for the region lies in the commodities world,” he says. “The region exports a lot of raw materials.”

Given the increasingly interdependent global economy, conditions in the U.S. and China also play a key role in Latin American prospects.

“For Latin America, China represents both an opportunity and a threat,” says Clyde Wardle, emerging markets strategist at HSBC. “The rise of China represents opportunities for Latin America, specifically in regard to accelerating the export of commodities.

“The flip side is the risk both of lower commodity prices and economic slowdowns in the U.S. and China,” he adds. “Slower growth in the U.S. will, of course, have a negative effect on exports from Latin America.”