Financial markets in Latin America have for the most part shrugged off the Fed's decision to taper its asset purchases under QE3. Currencies have dipped a little following the decision, but the declines have been modest in the context of the moves seen over the past six months. Meanwhile, most equity markets have rallied. The muted reaction is probably due to two factors. First, following the steep falls in financial markets since the summer, the decision to taper was largely priced into markets. Second, while the Fed scaled back the pace of its asset purchases, it also pledged to keep policy accommodative for some time yet. Nonetheless, while the big falls in Latin American markets are probably behind us, we expect further weakness next year. We think that most currencies will weaken by a further 5% or so against the dollar. The main exception is the Mexican peso, which we think will strengthen in 2014.
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