Latin America on the Brink

A stroll through charts in Latin America.

First currencies. USDCLP (Chile). Base, test, boom.

USDBRL (Brazil). Base, boom.

USDMXN (Mexico). Fakeout to breakout.

USDPEN (Peru) has a long way to go if it follows Chile and Brazil's currencies.

Country ETFs argue for a bottom, but there are also topping patterns that point to huge declines if they complete.

Individual stocks follow. These aren't selected for any particular reason as a group. Some are airport stocks that could sink if coronavirus spreads, some have nice patterns. My focus is on banks because of the currency component.

Canaries Dropping Against Dollar ARS,TRY,ZAR,BRL

Bloomberg: Zimbabwe’s Dollar Squeeze Worsens

Zimbabwe’s attempt to ease a dollar shortage and stop its currency from plunging in the black market is showing little sign of working.

The southern African nation’s currency, known as the RTGS$, fell to 4.2 per U.S. dollar Wednesday, its weakest level in more than five months, according to marketwatch.co.zw, a website run by analysts in Harare. That took its decline in March to 18 percent.

FT: Turkish officials just can't stop the lira's slide

And just like that, Turkey's currency has declined nearly 5 per cent against the dollar. The sell-off comes less than 24 hours after it cracked down on short-sellers by pushing the rate to borrow offshore liras overnight past 1,000 per cent. The rate settled around 750 per cent by end of day yesterday, and now sits at 32 per cent.

Today's catalyst: the $10bn drop in the country's foreign reserves last week, as Turkish officials desperately try to prop up the currency ahead of local elections on Sunday. That's a nearly 30 per cent drop from previous levels and brings reserves to just shy of $25bn.

The British pound slipped on Brexit news again and that spilled into euro today, both benefiting the U.S. dollar, but the usual suspects have been weakening for longer.

Rise of the Dollar: Argentine Peso Cracks

ZH: Argentine Peso Plummets To Record Low As Inflation Soars

Specifically, economists polled by Argentina’s central bank increased their end-2019 inflation expectations to 31.9% from 29%, according to the institution’s February survey.

The inflation is always there. What's driving it higher is the stronger U.S. dollar. Last year, the Argentine peso began its collapse right after China implemented its RRR-cut and the subsequent U.S. dollar rally it ignited. Once again, Argentina is the canary in the fiat mine.

Not in Good Company, M2 Growth Since 2008

Here's the graph at FRED.

Here's the same chart with Argentina removed.

Rubber Meets Road for Inflation Thesis as Truckers Strike

Reuters: Chinese truckers demonstrate over high fuel costs, truck-hailing app Manbang
The Guardian: Brazil faces calls for return to military dictatorship amid truckers' strike
Al-Monitor: Truckers display new face of popular protest in Iran
Telesur: Argentine Trucker Unions Set To Halt the Country Thursday
HindustanTimes: Pune trucker association on strike from July 26 demanding increase in service cost necessitated by fuel price hike
Hindu Business Line: Truckers flay daily fuel price change
Freight Waves: Trucking prices post large gains in May with spillover causing intermodal price rises
Supply Chain Dive: Trucker pay is up 15% amid driver shortage

Argentina Hikes Rates to 40pc

The thesis here is that the dollar collapse begins with deflation and hyperinflation in emerging markets as the system collapses from periphery to core. The U.S. dollar is artificially strong because it is the reserve currency, but it has inverse properties with respect to economic expansion. Economic growth requires rising money supply and the dollar is a credit money. Expansion causes dollar creation, a short position in USD (depreciation versus other currencies) and recession causes repayment and default (appreciation versus other currencies). (The whole system is depreciating against real assets.) The dollar will not be replaced as a reserve currency until there are alternative monies that can replace the dollar and carry out all its functions.

Some nations such as Iran, Russia and China have a political desire to move away from USD because USG uses it as a geopolitical weapon. However, there is no pressing economic need for a dollar alternative if the dollar is functioning, aka inflating. Almost everyone wants inflation. Many countries want to inflate more than the USD and they try to stop their currencies from appreciating during global expansion cycles. Necessity is the mother of invention. When would a dollar replacement be needed? During a depression, when credit contracts and money becomes scarce. (Millennials are creating cryptocurrency instead of creating USD through a mortgage).

A rapidly inflating USD would be welcomed by the world. It would stave off a dollar alternative for another decade or two. If dollar credit growth doesn't pick up, then foreign currencies will depreciate in the next deflationary wave, the USD high for this cycle has yet to be hit, and its possible China could be the lynchpin for a wave of currency devaluations that cleans balance sheets and creates the conditions for dollar replacement in the next 10 to 15 years.

ZH: Argentina Hikes Rates To 40% To Stall Currency, Bond Market Collapse

The Central Bank of Argentina (BCRA) just hiked its 7-day repo reference rate to 40.00% - up a stunning 1275bps in a week - in a desperate attempt to stall the collapse of the peso (and ARG bonds) this week.

BCRA hiked this week three times:

4/27 +300bps to 30.25%
5/03 +300bps to 33.25%
5/04 +675bps to 40.00%

The central bank said it will continue to use all tools at its disposal to avoid disruptions in the markets and guarantee a slowdown in inflation. The bank is ready to act again if necessary, it said in the statement.

As The FT reports, appetite for Argentine assets has been waning in recent months as concerns grow over the country’s painfully high level of inflation and large trade and fiscal deficits. A severe drought is also complicating President Mauricio Macri’s efforts to revive Latin America’s third-largest economy. Agricultural exports are one of Argentina’s main sources of hard currency, but the worst drought in decades is expected to hit this year’s soybean and corn harvests. The country’s famed cattle industry is also predicted to rack up millions in losses.

Argentina Nears the Breaking Point

Social order is breaking down in Argentina and the public is trying to restore order with lynchings of alleged criminals.

The article says the lynchings have "prompted deep social unrest," but this statement has it backwards. There is deep social unrest, therefore there are lynchings. The government is losing control, it is losing authority. The lynchings are a sign that the public is taking power for itself in response to chaos.

State of emergency in Buenos Aires province overwhelmed by crime and an outbreak of lynching

The governor demanded MPs also a “quick treatment and sanction” of the bill that creates municipal police in the provincial districts.
Furthermore, the governor announced the creation of 8 agencies with a capacity to host 1,000 prisoners and 4 penitentiaries.

Queried about what drove his decision to decree the security emergency, Scioli mentioned Friday’s shooting in the provincial locality of Bernal. “There were 50 gunshots in Bernal that could have ended up in a tragedy,” he said.

But even when Scioli he did not mention it, it was obvious that among his administration’s reasons to make the announcement are the lynching cases of alleged thieves in several provinces across the country, that have prompted deep social unrest and a strong debate among politicians over the past weeks, together with statements from the Catholic Church and from magistrates.