The Latin American currencies are performing well or poorly depending on your perspective. These currencies are stable to strong given the slowing of the US economy and the importance of this economic powerhouse to the Americas. The Brazilian real and Mexican peso have been unable to significantly surpass the highs of the past six months so they aren't too strong, but when you factor in the interest rate, they still provide a nice return. Equity markets are used as a predictor of future economic performance and in the US equities have been rising strongly since June. This upmove in the S&P has been very steady and this paints an optimistic picture for the future. Our models are quite positive on the BRL, but this is mainly due to a 6% interest rate advantage over the US in a world where yield is hard to find.
While the financial markets remain optimistic and equities are strengthening we favor holding long positions in the Latin American currencies. Although we aren't as positive on the economy, until there are signs of trouble we will stick with the trend. However, if the S&P falls below the strong support at 1400 then we will start to get nervous about the LatAm currencies. Our forecast calls for them to see mild weakness into next week and then turn higher into the middle of January. If the equity markets can keep their nerve during that period, then long BRL and MXN positive will be very profitable.
The British pound has been outperforming the other major European currencies during the past several weeks. This has been a good environment for carry trades and our naive index with a leverage of 3 has gained 2.36% thus far this month. The pound has also been supported by positive economic figures and retail sales rose 0.3% and this was higher than expected. Inflation expectations in the UK are rising and this increases the odds the Bank of England will raise interest rates at some point in the next few meetings. Short Sterling futures have priced in a % increase by March and our analysis of EUR/GBP calls for weakness during the next two weeks. The pound should be a relatively strong currency.
The cycles call for GBP/USD to see weakness into the middle of next week, but it is unlikely to prove too aggressive and it could remain in the range of the past two weeks. The support between 1.9550 and 1.9570 could possibly hold and our maximum target for this decline is 1.9400. Buy more pounds on weakness. Following this low the pound should turn higher and rally for several weeks.
The resistance at 1.9695 should hold during the next few days and only a close above 1.9750 means the uptrend has resumed. The pound is then headed higher into the middle of January and can rally to as high as 2.0400, but this next upmove should be postponed.