Setting up for range trading?

Because commodity prices remain a critical component of the Latin economy, a significant retreat in commodities would negatively impact Latin growth prospects and, in turn, the region’s currencies.

Tighter global liquidity is another potentially limiting factor for Latin markets in 2007. Global equity markets will again be key signals for risk tolerance. Continuing strength in global equities will allow global fund managers to extend by 10 to 15 percent into emerging markets. But a sudden drop in the S&P 500 could push fund managers to trim exposure to Latin American markets to single digits.

“In the last three years, we’ve seen a sell-off at least once a year [in emerging markets]; then they get corrected,” Bank of America’s Estebanez says.

Given the underlying improvement in fiscal and economic outlooks, perhaps a 2007 emerging markets exodus could offer a buying spot.

Overall, most market watchers believe the recent Latin American currencies’ outsized gains are likely to give way, at best, to modest appreciation.

“Latin American currencies will have more difficulty making headway this year,” Ideaglobal’s Alvarez notes. “We are up against large resistance levels and have been for a while.”

Persistent central bank intervention to stem the appreciation tide of local currencies is expected to continue, as Latin governments attempt to retain their exporting edge. Range trading could result throughout the year as a result.

“For investors looking to trade trends it would be best to abide by ranges. Sell rallies into resistance and accumulate into retreats into support,” Alvarez says.

“I don’t think you are going to see big moves this year,” Estebanez concludes. “We could see a weakening across the region if there is an [emerging markets] sell-off, but the bottom line is no big moves are expected.”