One might have thought that in a world of lower US interest rates and a broadly weaker dollar, the Latin currencies could have started to do a little better. But no, both USD/MXN and USD/BRL bucked the USD trend yesterday and rallied, ING’s FX strategist Chris Turner notes.

More pain for the Peso, stay bearish on the Real

We had mentioned previously that we thought USD/MXN would struggle to trade under 18.50 because of constitutional reforms being discussed in September. However, it also seems that the Peso is still very much driven by USD/JPY trends. Instead of seeing the weaker dollar, USD/MXN sees the stronger JPY – i.e. carry trade dynamics still dominate. Given we're bearish USD/JPY into September, this suggests more pain for the Peso.

For the Brazilian Real, comments from the central bank that it might not deliver on the market's pricing of rate hikes was a key driver yesterday. Additionally, we are still waiting on the government's 2025 budget plans on 31 August. Doubts remain as to whether the government is prepared to cut spending enough to stabilise the debt trajectory. And we would stay bearish on the Real unless the government surprises with some fiscal consolidation.