FX Markets Best Banks Awards 2020: Best bank for Latin America and USD/BRL – Santander

Santander is committing to upholding liquidity in the Latin American FX markets and serving clients through the challenges posed by the Covid‑19 pandemic by further enhancing its product offering in 2021

Latin American currencies were particularly shaken by Covid‑19 turbulence in early 2020, with some pairs losing nearly half of their value against the dollar at their lowest as liquidity conditions became extremely tight at the height of volatility in March and April.    

The Brazilian real was one of the region’s hardest-hit currencies. The currency of the largest economy in Latin America lost 44% of its value in the first half of 2020 after reaching the historic low of BRL5.85 against the dollar. The pandemic-induced drop was further amplified by the string of rate cuts by the Brazilian central bank, which successively slashed interest rates from 4.5% at the beginning of the year to 2% by August. 

The real and many of the region’s currencies remained weak throughout the first half of the year, but liquidity injections by monetary and finance authorities dampened the turmoil, and many currencies recovered some, if not all, of the ground initially lost.

“Market liquidity was rather stressed when the Covid-19 pandemic started and was particularly difficult in March and parts of April, but reverted surprisingly fast,” says Rafal Foltynowicz, global head of FX at Santander Corporate & Investment Banking. “The combined interventions by central banks and ministries of finance were key to this as they were swift and very effective.” 

While few countries in the region were spared market disruption, their response differed in large part on the capacity of central banks to use FX reserves to alleviate market dislocation. Countries with ample FX reserves, such as Peru and Brazil, used these as their main mechanism of intervention while Chile relied on the capacity of its sovereign wealth fund and Colombia resorted to tapping a financial lifeline from the International Monetary Fund (IMF). 

Despite highly volatile markets and stressed market liquidity, the combined efforts of local and foreign banks such as Santander played a major role in maintaining a healthy flow of liquidity throughout the period, explains Foltynowicz.

“2020 was one of the most volatile in many years, where we reached new highs in the dollar versus most of the Latin American countries in the first half of the year,” says Foltynowicz. “Currencies and market liquidity were stressed to extreme levels, but all players responded by keeping the markets alive and functioning.”

Despite the shift to a home-working environment, Santander, which was voted best bank for Latin America and the USD/BRL pair at FX Markets 2020 Best Banks Awards, used its extensive network across Latin America to maintain liquidity at healthy levels. Consequently, spot volumes in non-dollar crosses against Latin American currencies actually increased and a wider universe of strikes were made available in the FX options market as its capacity to hedge positions deepened significantly.

“There was some overall reduction in volumes traded,” says Foltynowicz, “but as the largest FX house in Brazil and among the leading banks in other Latin American countries, Santander was able to minimise this impact as our capacity to absorb big flows in a turbulent market environment helped us serve our clients effectively, even in the most critical days of the crisis.

“This reflects the hard work and special relationship the bank holds with its clients within the region and points to the strength of our FX strategy and services and showcases our ongoing commitment to provide the best financial solutions to our clients worldwide.”

Brighter days ahead?

While the IMF estimates that the GDP of Latin America contracted by more than 7% in 2020, the expected recovery of the global economy and the roll-out of Covid‑19 vaccinations helped many currencies in the region regain lost ground in the second half of the year or, in the case of the Chilean peso, end the year on a stronger footing than where it started. While the outlook for the region’s currencies in 2021 is somewhat favourable, this could possibly be blown off course by a number of potential headwinds. 

“Commodity markets would indicate that currencies should perform well, but the sudden jump in the US rates has spooked many investors as to the direction of flows,” says Foltynowicz. “We will be watching the speed of vaccinations very closely to see how it impacts economic recovery and growth.” He says economic recovery will affect the extent to which countries are able to adjust in light of the massive fiscal deficits they drew on to prop up their economies against the disruptions brought on by the pandemic.

“The fiscal outlook will be an important factor and will determine the risk premium that it might generate,” says Foltynowicz. “The faster growing countries will definitely attract the most flows.”

Some events, such as mid-term legislative elections in June in Mexico, will drive volatility in the local currency – as will the pace of liberalisation of the Chilean peso and Brazilian real, as announced by Brazil’s central bank president Roberto Campos Neto in May 2019.

Irrespective of market conditions, Santander remains committed to upholding liquidity in the Latin American FX markets and to serving its clients in the most challenging and demanding environments, says Foltynowicz. “In 2021 we will continue to enhance our product offering, beginning with the deployment of an FX trading application programming interface so our clients can connect directly to our trading platforms.” 

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