LATAM currencies are back in the game. Optimism over Brazil’s political future is growing and commodities, a key driver of regional growth, are recovering. Together, much of the uncertainty looming over the region has been removed and put regional currencies -the Brazilian Real, Mexican Peso and Chilean Peso into favor.
One important gauge of rising optimism is the price of Credit Default Swaps. Credit Default Swaps, or CDS for short, measure the cost of insuring against a bankruptcy. When the price of Credit Default Swaps falls, it points on lower risk and higher optimism. As the chart below indicates, Credit Default Swaps have fallen dramatically across the region since February, signaling a surge in optimism in the LATAM space.
Chart courtesy of Deutsche Bank
But the CDS chart illustrates another very interesting picture. While the fall in risk is across the board, Brazil, the largest economy in the region, is deemed as the most probable to default on its debt by a wide margin compared to much smaller regional peers. [Continue reading]