Mexico's recent interest rate cut probably leaves limited room for currency gains, but the peso is set to handily outperform the Brazilian real over the next 12 months, a Reuters poll showed on Wednesday. Mexico's peso is seen strengthening to 12.70 per dollar in a year, gaining 3 percent from Tuesday's close, while Brazil's real is expected to weaken 5 percent to 2.40 per dollar over the same period.
Estimates for the Brazilian real were unchanged from the latest poll in October, while the 12-month view for the Mexican peso weakened slightly from 12.615 per dollar. The change in consensus comes after Mexico's central bank cut its base interest rate to a record low late last month to revive the economy, which contracted for the first time in four years during the second quarter.
Over the next few months, room for gains in the Mexican currency has become narrower, said Arnoldo Lopez, an economist with BBVA, in Mexico City. "It's likely to move sideways," Lopez said. However, despite the frustration with Mexico's growth, investors remain optimistic about prospects for reforms in the longer term, which should attract foreign capital.
Meanwhile, a record budget deficit in September renewed fears Brazil is running out of ammunition to protect itself against another round of global market volatility, expected when the US Federal Reserve starts reducing economic stimulus. "Fundamentals will push the Brazilian real lower," said Thiago Alday, an strategist with BNP Paribas. "The central bank's foreign exchange auction program was successful in calming down the market, but the lack of actions from the government on the fiscal side and to address structural problems of the economy will drive the currency lower."
Brazil ran a primary budget deficit of 9.048 billion reais ($4.1 billion) in September, its biggest in nearly five years and the worst ever recorded for the month. The results, which came in much worse than all forecasts in a Reuters poll, heightened fears of a credit downgrade by at least one ratings agency.
Brazil's main line of defence has been its high interest rates, one of the world's highest at 9.5 percent. After lifting key capital controls in June, Brazil has attracted record inflows to local fixed-income markets over the past four months, which analysts say has helped limit further currency losses.
But analysts in the poll said volatility may spook carry trade investors, who leverage their gains by borrowing money in low-yield currencies such as the Japanese yen. Eight of 14 analysts who responded to an extra question in the poll said carry trades involving the Brazilian real will likely diminish over the next 12 months, while the other six were split between no change and forecasts of an increase.
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