Latin American currencies are set to weaken further in 2016 because of a persistent economic downturn and low commodity prices, according to a Reuters poll that identified Brazil and Argentina as likely hot spots for volatility. The Brazilian real, one of the world's biggest losers last year with a 33 percent slide, is forecast to fall 7 percent more in 2016 to 4.25 per dollar in 12 months, according to the median forecast from 25 foreign exchange strategists.
That is down from a December poll that put the real at 4.09 per dollar within 12 months. Overall, strategists also said they expected Latin American currencies to continue suffering from stubborn inflation at home and fears of competitive devaluation from China. Rising US interest rates are also a potential source of instability, they said.
"This year is going to be very similar to 2015," said analyst Jesus Lopez of Banco Base in Mexico. The Mexican peso, tied to an economy that is much less exposed to commodity prices, will probably remain the exception and outperform its regional peers. Underpinned by the US economic recovery and low inflation in Mexico, the peso, is seen at 17.0 per dollar in 12 months, up 1 percent from last year.
But depressed copper and oil prices are likely to weigh heavily on the Colombian, Chilean and Peruvian currencies for longer than previously anticipated, Scotiabank strategists Pablo Breard and Shaun Osborne wrote in a note. Among this group, the Colombian peso had the sharpest downward revision in the 12-month outlook from December, to a current estimate of 3,300 per dollar at the end of 2016. Weak commodity prices and reduced global trade are not entirely to blame for Latin America's poor outlook, which also extends to the region's equity markets.
For Brazil, market players revised their foreign exchange estimates to account for a deepening recession, which is now expected to be the worst since at least 1901, and its political quagmire, with efforts to impeach President Dilma Rousseff. "The Brazilian real is expected to depreciate further as the macro picture continues to deteriorate," said Alberto Ramos, co-head of Latin America economic research at Goldman Sachs in New York. He also cited the impeachment proceedings against Rousseff.
Doubts also hang on the Argentine peso following a devaluation last month that was initially seen as a successful step to liberalize an economy heavily managed by the government. Now, however, analysts wonder what the peso's "fair value" really was. "There are still too many distortions," said economist Pedro Tuesta of the 4Cast research firm in Washington.
The 14 forecasts for the Argentine peso at the end of 2016 ranged from 14.62 to 17.36 per dollar. "We believe the peso is already near its fair value," said economist Joao Pedro Bumachar of Itau Unibanco in Sao Paulo, "but it will weaken further over the year just because inflation is too high there."
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