Mexico peso seen most vulnerable in Latam to potential Fed rate hike

Latin American currencies probably face months of renewed volatility as a challenging global outlook weighs on the Mexican peso and a lingering political crisis burdens the Brazilian real, a Reuters poll showed on Thursday.
Unease over the prospect of a US interest rate hike in coming months helped send the Mexican peso down 7.5 percent in against the dollar in May. It will take one year to slowly recover to levels last seen one month ago, according to forecasts of foreign exchange strategists.
The currency is expected to trade at 17.50 in 12 months. This estimate was 1.4 percent weaker than last month's projection for the same period, representing the steepest cut in forecasts among Latin American currencies in the survey. In contrast, strategists were slightly more bullish than a month ago on the real, the Peruvian sol and the Colombian and Argentine pesos.
The real was seen at 3.82 reais to the dollar in one year, 2.1 percent stronger than in last month's poll. The poll also saw the Colombian and the Argentine pesos, at 2,960 and 16.50, respectively, in 12 months' time, and the Peruvian sol at 3.50 to the dollar in the same time period.
Analysts were slightly more bearish than a month ago on the Chilean peso, seeing it at 690 one year from now.
Overall, traders in the region will keep a watchful eye on the Federal Reserve's monetary policy. "The impact of Fed rate hikes is hard to predict, increasing risk aversion and a flight to the safety of the dollar," said Felipe Campos, an economist at the Alianza brokerage in Bogota. Mexico's central bank will take into account the exchange rate and the Fed's upcoming rates decision when it meets on June 30 to set monetary policy, Central Bank Governor Agustin Carstens said on Tuesday.
A sharp drop in Mexico's peso pushed the central bank in February to intervene directly in currency markets for the first time since 2009 and to raise interest rates unexpectedly after an unannounced meeting.
Now, the effectiveness of any renewed intervention move could be limited, said Pedro Tuesta, an economist with research firm 4Cast.
"The problem for Banxico (the Mexican central bank) is that intervention only works when liquidity is low and so far that is not the case," he said. With the peso trading the largest volumes in Latin American markets, "Banxico will have to use heavy artillery", Tuesta added. Investors need to pay attention to other central banks too. According to analysts with Societe Generale, the biggest threat to the Mexican peso and other emerging currencies may not come from the Fed, which has tried to communicate every policy step in order to avoid market turmoil.