Mexico's peso is falling victim to increasing global trade tensions and will likely struggle in the near future, only a few months after the currency was spared from the impact of direct US tariffs, a Reuters poll showed. The peso is expected to trade at 19.66 per dollar in one year, 0.4% weaker than July's survey and 0.2% softer than its intraday value on Wednesday, according to the median forecast of 17 analysts polled Aug. 2-6.
Like all emerging market currencies, the peso took a hit as China dramatically let the yuan fall past a key level in response to fresh tariff announcements from Washington. However, the peso is seen as less ready to cope. At issue is its particular vulnerability to a more persistent sell-off due to Mexico's "rising idiosyncratic risks," Natalie Rivett, senior emerging market analyst at Informa Global Markets, said.
President Andrés Manuel López Obrador's administration "has lacked the delivery of reforms intended to attract investment and boost productivity," she added. Mexico narrowly avoided a recession during the first half of 2019. The peso's exposure to protectionist outbursts last came to light in May, when US President Donald Trump threatened to impose tariffs on Mexican goods unless illegal immigration is curbed.
It recovered in June as Mexico struck a migration deal with the US But this was not enough to firmly anchor the currency, which has now been pushed into turbulent waters one more time. All eight respondents who answered a separate question on the risks to Mexico's foreign exchange rate said it was tilted toward further weakness, consolidating a view that appeared in April and has remained since then.
Meanwhile, Brazil's real was forecast to recover 3.4% in one month, staying resilient across the foreseeable future. Most analysts think flows chasing market-oriented policies will keep underpinning the currency despite global worries. It recently gained 7.6% in little more than two months, from its May lows until the end of July, as investors rejoiced over progress with President Jair Bolsonaro's pension reform bill in Congress. But some remain cautious.
"It now seems that the trade war will be longer than expected," Juan Prada, a Barclays strategist, said. He added this may trigger a downgrade in the bank's forecast, currently at 3.90 reais per dollar in a year. "Although Brazil's economy is relatively closed and should remain more isolated to international tensions, it is not immune to global developments," he added. So far, political uncertainty has been the biggest hurdle for growth.
Disruptive reforms, high unemployment and the emergence of other problems like accelerated deforestation have alienated many Brazilians from Bolsonaro's administration and well-to-do investors. Bets on Brazil's stock market have yielded 13.9% in dollar terms this year, thanks to a positive mood on local equities. In neighbouring Argentina, the picture is more complicated, as usual.
Argentines go to the polls on Sunday for a key primary election. A good showing by President Mauricio Macri would support the peso after three rare months of stability, while a Peronist win could throw it into disarray again. "One of the political parties will follow pro-business policies, the other one will not," Matías Rajnerman, chief economist at Ecolatina consultancy, said..
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