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Latin American Currencies Sink on Yuan Devaluation Woes

How Has the Devaluation of the Yuan Impacted Global Markets?

(Continued from Prior Part)

Plunging commodities and slowdown in China rattle Latin American currencies

Latin American currencies bore the brunt of a rapid plunge in commodity prices coupled with the ongoing slowdown in the Chinese economy. Speculations were rampant that a weakening yuan could intensify the competition among major commodity exporters throughout the continent.

Over the last few years, Latin America has had a close relationship with China. Latin American countries provide raw materials to China, while China processes the raw materials and exports them back to Latin America. However, with China undergoing a strategic shift towards domestic consumption to drive growth rather than exporting manufactured products, the balance of forces might undergo a rearrangement. This shift could hurt economies that are dependent on China for their internal growth.

Colombia and Mexico lead the fall while Brazil escapes with positive political news

Between the close of August 7 and August 21, the Colombian peso and the Mexican peso led the downfall in South American currencies. Both of these companies export a large quantity of crude oil to China. Both the currencies dropped to record low levels. The US dollar/Colombian peso pair crossed the 3,100 mark, while the US dollar/Mexican peso pair nearly touched the 17 level on August 21.

China, the largest buyer of copper from Chile, affected the value of the Chilean peso negatively, which dropped to 12-year lows. However, the Brazilian real gained amid signals that the impeachment of the Brazilian President might be avoided, which would prevent the economy from receiving a junk credit rating.

Impact on the market

Latin American ETFs performed very badly between August 7 and August 21. The iShares Latin America 40 ETF (ILF) and the iShares MSCI Brazil Capped ETF (EWZ) fell by 8.60% and 6.27%, respectively.

The American depository receipts (or ADRs) trading in South American countries bore the brunt of the yuan devaluation. Brazilian oil major Petroleo Brasileiro Petrobras (PBR) fell by 12.89%, while Colombian petroleum multinational Ecopetrol (EC) went down by 7.84%. Mexican construction company Cemex (CX) plunged by 18.42%.

Continue to Next Part

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