Fundamental analysis
Interest rates and their expected path explain most of the movement in currencies. For the region you have to add a layer: copper, Brent, soya and remittances.
Fundamental analysis in the currency market comes down to tracking the interest rate differential and its expected path. A currency appreciates when the market expects its central bank to raise rates relative to those of other countries. The key events for Latin American currencies are the decisions of Banxico (Mexico), COPOM (Brazil), BanRep (Colombia), the BCRP (Peru) and the BCCh (Chile), together with the meetings of the United States Federal Reserve, the inflation releases (CPI, IPCA and INPC) and United States employment data.
1. The central principle: the market prices expectations, not facts
The exchange rate does not reflect the current rate but the forecast of how it will change. If the market had already priced in a 25 basis point rise and that rise happens, the move may be nil or even the opposite. The reaction is determined by the surprise: the difference between the actual figure and the consensus.
Before an event do not just look at the expected value, look also at the “forecast” column of the calendar. The trading idea is built on an estimate of the probability of deviation, not on the fact of the release.
2. Interest rates, the main driver
| Central bank | Country | Meeting frequency | Influences |
|---|---|---|---|
| Federal Reserve (Fed) | United States | 8 times a year | all USD pairs, gold, indices |
| Banxico | Mexico | 8 times a year | USD/MXN |
| COPOM (Banco Central do Brasil) | Brazil | 8 times a year | USD/BRL |
| BanRep | Colombia | monthly | USD/COP |
| BCRP | Peru | monthly | USD/PEN |
| BCCh | Chile | 8 times a year | USD/CLP |
| ECB | Eurozone | 8 times a year | EUR/USD |
This table also serves as the static reference on the education centre page while the live economic calendar is not connected to an external data provider.
Mechanics
A rise in the Banxico rate makes the peso more attractive to hold: the yield on peso-denominated instruments rises, demand for pesos increases and USD/MXN falls. A rate cut works in the opposite direction.
Rate differential
What matters is not the absolute level but the difference. A Banxico rate of 10.25% against a Fed rate of 4.50% gives a differential of 5.75%: that is the reason for the Mexican peso's historical popularity in carry trade strategies. A narrowing of the differential — the Fed raising and Banxico cutting — has historically been accompanied by weakness in the peso.
USD/MXN: 10.25% − 4.50% = 5.75%
What to read in the minutes
The rate decision is published instantly and the market prices it in within seconds. More relevant is the wording of the accompanying statement (forward guidance) and the minutes of the meeting, published later. A change to a single sentence about “maintaining a restrictive policy” can cause a larger move than the decision itself.
3. Inflation
| Indicator | Country | Release |
|---|---|---|
| CPI / Core CPI | United States | monthly |
| PCE | United States | monthly |
| INPC | Mexico | twice a month |
| IPCA | Brazil | monthly |
| IPC | Colombia and Chile | monthly |
Accelerating inflation raises the probability of the central bank tightening policy, which strengthens the currency in the medium term. Inflation out of control, however, works the other way: it destroys confidence in the currency and causes capital flight. The first mechanism dominates at inflation of 3 to 8%; the second, at double-digit inflation.
Core inflation excludes food and energy and reflects sustained price pressure more accurately. Central banks decide mainly on the basis of it, which is why the market reacts more strongly to the core figure than to the headline index.
4. United States data that moves everything
Non-Farm Payrolls (NFP)
First Friday of each month, 13:30 GMT (07:30 Mexico City time). It is the most volatile regular event of the month. A EUR/USD move of 60 to 120 pips in the first few minutes is the norm. Spreads widen by 5 to 20 times and slippage reaches dozens of pips.
United States CPI
Released around the 13th. Since 2022 its influence on the market has frequently exceeded that of the NFP, because it determines the path of the Fed's interest rate.
Second tier
Retail sales, ISM, GDP and jobless claims. They produce smaller moves, but can prove decisive when they confirm or contradict the reading of the main data.
5. What is specific about Latin American currencies
USD/MXN
Beyond Banxico, the drivers are: the volume of remittances from the United States — around 63 billion USD a year, which makes that flow a cross-border factor in demand for pesos — trade relations with the United States (close to 80% of Mexican exports) and production data and sentiment around nearshoring.
USD/BRL
Driven by the Selic rate, the prices of soya, iron ore and oil, and fiscal policy. The Brazilian real is historically more sensitive to fiscal news than to monetary news.
USD/CLP
Practically a derivative of the copper price. The peso's correlation with copper is historically close to −0.80: a rise in copper strengthens the Chilean peso. A trader who trades USD/CLP without watching copper is trading blind.
USD/COP
Driven by the price of Brent crude. Oil makes up a relevant share of Colombia's export earnings, so a fall in Brent feeds through into a depreciation of the peso with a lag of 1 to 3 days.
USD/PEN
Copper and gold. The Peruvian sol is historically the least volatile currency in the region thanks to the BCRP's policy of smoothing fluctuations through intervention.
6. How to work with the news
There are three approaches and only two make sense.
Do not trade at the moment of release
Close positions or reduce volume 15 minutes before the event and come back 30 minutes afterwards. It is the most robust option for most traders: it removes the risk of slippage and of a widened spread.
Trade the reaction, not the fact
Wait for the close of the first 5 or 15 minute candle after the release, assess where the market has settled and enter in the direction of that consolidation after a pullback. The first candle contains the emotional discharge and frequently reverses.
Trade the exact moment
Pending orders on both sides of the price a minute before the release. In practice this gives negative expectancy for the retail trader: slippage on execution, the widened spread and the frequent triggering of both orders eat up the edge.
At the moment high-importance data is released, the stop loss may be executed at a price significantly worse than the one set. This is not an action by the broker but the consequence of a break in liquidity: orders at the intermediate prices physically do not exist at that instant.
7. Market sentiment and capital flows
Risk-on / risk-off
When risk appetite rises, capital moves into emerging market currencies: the MXN, the BRL and the COP appreciate. In a flight from risk, capital takes refuge in USD, JPY, CHF and gold, and Latin American currencies weaken. The usual regime indicator is the VIX index: readings above 25 usually mean risk-off.
COT report (Commitments of Traders)
Published by the CFTC on Fridays, it shows the positions of large participants in the futures market. It is a tool for assessing extremes of positioning: a record long position among speculators frequently precedes a turn, simply because there is no one left to buy.
Interactive correlation matrix
Select two instruments and see the effective risk of holding both positions. The difference between declared risk and real risk is what usually destroys accounts that “only risk 1% per trade”.
Test: fundamental analysis
9 questions with explanations. They check: the market's reaction to a decision that matches the forecast, the relevance of the accompanying statement, calculating the rate differential, the relationship of USD/CLP to copper and of USD/COP to oil, the meaning of core inflation, the behaviour of the spread during releases, risk-on and risk-off regimes, and why two-sided pending orders before a news release give negative expectancy.
Frequently asked questions
A rise in the Banxico rate raises the yield on peso instruments and usually causes a fall in USD/MXN, that is an appreciation of the peso. A cut works the other way. The move, however, is determined by the deviation from the market's forecast: if the rise was already priced into quotes, the reaction may be minimal.
The greatest impact comes from central bank interest rate decisions, inflation releases (CPI and core CPI) and the United States employment report (Non-Farm Payrolls, the first Friday of each month at 13:30 GMT). For Latin American currencies the prices of copper, Brent crude and agricultural commodities also matter.
For most traders, no. At the moment of release the spread widens by 5 to 20 times and the stop loss may be executed at a considerably worse price than the one set, because of the break in liquidity. A more robust approach is to wait for the close of the first 15-minute candle and trade the market's reaction, not the fact of the release.
Copper accounts for a significant share of Chile's export earnings, so its price directly affects the inflow of foreign currency into the country. The historical correlation between USD/CLP and the copper price is negative and close to −0.80: a rise in copper is accompanied by an appreciation of the peso. Analysing USD/CLP without watching copper is incomplete analysis.
The differential is the difference between the interest rates of the two countries whose currencies form the pair. With a Banxico rate of 10.25% and a Fed rate of 4.50%, the USD/MXN differential is 5.75%. That differential determines the size of the swap and is the basis of carry trade strategies, but it does not protect against exchange rate moves.
The sensible options are to close the position, reduce the volume or move the stop to break-even before the release. Keeping the full size means accepting that the stop loss may be executed dozens of pips below the level set. Sening Capital warns in the order window when less than 15 minutes remain until a high-importance event affecting the instrument's currencies.
The economic calendar is inside the platform
Sening Capital filters events by countries in the region and warns in the order window when less than 15 minutes remain until high-impact data.
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