The outlook for Latin American currencies has improved further, a Reuters poll showed on Wednesday, but questions about the ability of Brazil's likely new government to plug a massive budget deficit stand in the way of future gains. The possibility of a rate hike by the US Federal Reserve next month could also hit the region's currencies, which have strengthened for three months in a row along with a global rally in riskier assets.
Local markets also got a lift from hopes for policy change in Brazil, where Vice President Michel Temer, perceived as more friendly to investors, is expected to replace beleaguered President Dilma Rousseff next week. Median estimates from the 46 foreign exchange strategists in the poll reflected that extended optimism. The Brazilian real was projected at 3.90 per dollar in 12 months, 3.2 percent stronger than in April's one-year view. The weakest forecast was 4.60, and the strongest was 3.25.
The strategists pegged the Mexican peso at 17.25, up 0.9 percent from last month. Forecasts ranged from 19.00 to 15.00. Estimates were practically unchanged for the Chilean peso at 685.0, the Colombian peso at 3,000 and the Peruvian sol at 3.53. In Brazil, the worst recession in a century opened a huge budget deficit and cost the nation its prized investment-grade ratings last year. Temer's aides have emphasized the need to rein in debt but suggested no new taxes in the short term.
Any new government in Brazil "would have to prove that it is capable of stabilizing fiscal dynamics in the years to come," said strategist Andres Jaime Martinez of Barclays in New York. Rousseff is set to be suspended from office next week for allegedly breaking budget laws. A final decision on her impeachment by the Senate could take six months.
The US central bank is another source of uncertainty after three months of relative calm. Taking a firmer stand than in March, the Fed noted in its policy statement last month that the labor market had improved and removed references to fears stemming from China. It added that it was keeping a close eye on inflation, leaving the door open to a rate hike next month.
"Although monetary policy normalization in the US is poised to be very gradual, markets already price a very benign scenario," said Martinez. A sense of caution remained present in comments from all Latin American capitals. In Bogota, Catalina Guevara at Alianza Valores brokerage said: "It's hard to think that the depreciation of the Colombian peso is over, considering US monetary policy and oil prices, which face oversupply and years of weak demand."
The median forecast for the Argentine peso in one year was at 16.75. "We expect a mild spike in the foreign exchange rate (against the peso) in coming weeks as soon as the central bank cuts the policy rate in response to a slowdown in core inflation," said Miguel Zielonka, associate director at Econviews in Buenos Aires.
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