BUENOS AIRES: Latin American currencies are set to remain weighed down this quarter by continuing fears about Brazil’s public finances and Mexico’s close link to US politics before the November presidential vote, a Reuters poll showed.
Brazil’s real is forecast at 5.40 per US dollar in one month, according to the median estimate of 22 analysts polled Sept. 28-Oct. 1, 4.2% stronger than its value on Thursday but staying for the seventh month well beyond 5.0, reflecting a guarded short-term outlook.
It is forecast to trade at 5.0 in a year, a bigger sample of 34 economists showed. The main question is to what extent President Jair Bolsonaro is committed to resuming fiscal tightening after a decision well into the pandemic to pump up spending to fight the disease.
His government has shelved an initial cost-cutting drive and boosted expenditure in a late response to a health crisis that has claimed almost 145,000 Brazilian lives, the world’s second- highest toll after the United States.
Bolsonaro used social media this week to counter criticism he is pushing a minimum income program, with an eye on the 2022 presidential election, while stressing fiscal discipline is one of the “rails of the economy”.
“An uncertain economic recovery, weaker fiscal positions and low interest rate differentials should keep Latam currencies on the depreciated side,” BofA Securities analysts wrote.
“We do not like the risk-reward of being long given the high volatility and lack of positive catalysts into year-end.”
The real is down 28.6% since the start of 2020. At its present rate over 5.60, it is now in sight of a record low of 5.88 it logged in May, when the number of coronavirus cases was rising fast in Brazil.
Mexico’s peso has fared somewhat better, with a milder 13.4% loss so far in the year, partly due to the country’s strong connection with the US economy, its main trading partner, which for now is rebounding. The peso remains exposed to what happens in the run-up to the Nov. 3 US presidential election.
“We look for the Mexican peso to strengthen as the global economic recovery continues uninterrupted and the US dollar continues to broadly weaken,” said Brendan McKenna, FX strategist at Wells Fargo Securities.
“Risks to the forecast are tilted to the downside, however, as additional US fiscal stimulus is still elusive and risks around another wave of Covid-19 infections that result in lockdown protocol are still elevated.”
US Treasury Secretary Steven Mnuchin and House of Representatives Speaker Nancy Pelosi have been holding talks this week in hopes of bringing closer a vote on coronavirus relief legislation. Negotiations had broken down in August with the two sides far apart.
In the survey, the peso is seen at 22.10 per US dollar in one month, 1.1% softer compared to this week, and then trading close to 22.0 for a year, inside a range where the currency stabilized after the initial Covid-19 shock.
In Argentina, the spread between the strictly regulated official exchange rate of the peso and its parallel value is likely to remain wide, given the slow depreciation pace expected in the poll. The parallel rate weakened further in recent days as demand for US dollars surged after the imposition of new restrictions that make it hard to purchase the greenback at the much-cheaper official value, a move aimed at protecting the country’s dwindling reserves.
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