The outlook for Latin American currencies has brightened on a general improvement in investor sentiment globally along with prospects for political change in Brazil, a Reuters poll found, although volatility is expected to persist.
The region's pairs recovered in March from heavy losses at the start of 2016 on renewed bets for risky assets as the US Federal Reserve adopted a dovish stance over worries about China's slowdown, but strategists fear this could change soon.
Brazil's real is now forecast at 4.025 per dollar in 12 months, according to the median of 28 estimates by market strategists in the survey, 5 percent stronger than last month's poll, when it was expected to trade at 4.250 by then.
The real put in its best monthly performance in more than 13 years in March, along with an explosive rally on Brazil's stock market, based on growing chances unpopular President Dilma Rousseff, mired in scandals, might be impeached.
Optimism has faded in recent days, however, on signs Vice President Michel Temer would struggle to build a strong coalition if Rousseff is impeached.
Turbulence from Brazil's political crisis, the worst since a presidential resignation in 1992, is likely set to dominate market focus ahead of an impeachment vote later this month. Elsewhere in Latin America, lower expectations for Mexico's economy, which recently contributed to a negative rating outlook by Moody's, could also rekindle volatility. The poll pegged the Mexican peso at 17.40 per dollar in one year, a near 1 percent increase from last month's poll. Forecasts for the Colombian and Chilean pesos also improved from last month's polls, to 3,100 and 690.0 respectively.
Tension could resurface as investors start speculating whether the Fed will in June make the first of two US rate hikes expected for 2016. Diverging views among officials in the minutes from the bank's March meeting could further reduce visibility. Recent volatility in emerging currency markets "is very likely to continue this year, mainly due to the way that US monetary policy is being driven," said Alex Agostini at Austin Rating in Sao Paulo.
Uncertainty over the forecasts, as measured in the poll's standard deviation readings, remained high. Forecasts for the real in 12 months, for example, ranged from 3.45 to 4.70 reais, while estimates for the Mexican peso were between 15.0 and 19.0. The Mexican peso is up around 7.8 percent from its historic lows above 19.00 in mid-February, when authorities unexpectedly raised interest rates and announced spending cuts to reassure investors during a global round of market volatility.
"An expected recovery in oil prices later this year will likely help to sustain the currency around the current levels," economists with Brazilian-based Itau Unibanco said in a note.
The Argentine peso was forecast at 16.6 in one year, in a sign investors do not expect another major devaluation in the currency as the country finally returns to debt markets after 15 years of financial isolation following a crisis in 2001.
"The resolution of the debt default will encourage dollar inflows," helping stabilise the peso, said Martin Polo, at Analytica in Buenos Aires.
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