Pension reform vote clouds outlook for Brazil's currency

Brazil's currency will become more volatile in coming months as investors fear lawmakers could block key austerity measures ahead of next year's general elections, strategists said in a Reuters poll. The Brazilian real is forecast at 3.25 per US dollar in a year from now, 3 percent weaker than Tuesday's close but stronger than a forecast of 3.295 per dollar in an April poll, according to the median of 18 estimates in the survey.
Strategists also upgraded their outlook for other major Latin American currencies, with the Mexican peso forecast to trade at 19.20 per US dollar a year from now and the Colombian peso projected at 2,971.0. The Brazilian real has gained 10 percent since President Michel Temer took office nearly a year ago on hopes he would be able to get his allies in congress to approve a series of landmark economic reforms and help pull the economy out of a deep, two-year-long recession.
However, if he fails to win approval for an overhaul of Brazil's social security reform, the real could weaken to 3.65 per dollar this year, according to the median of eight alternative estimates that ranged between 3.30 and 4.00. Uncertainty over the pension reform vote, Temer's no.1 priority, has grown as traders and investors watch the administration struggle to muster the 308 votes needed to pass the bill in the Lower House.
"Volatility will be the rule over the next months," said Jankiel Santos, chief Brazil economist at investment bank Haitong, in S?o Paulo. "There's no way we can try to anticipate political events such as this one." Economists and investors see pension reform as the only way for Brazil to shore up its finances in the long run without resorting to massive tax hikes.
However, 71 percent of Brazilians oppose it as most would have to work longer to reach a minimum retirement age of 63 to 65 years and could earn less, according to a national Datafolha survey on Monday. Legislators, dozens of whom are under investigation for corruption, will face a tough campaign for re-election next year. Temer already watered down his original pension reform proposal to roughly three-quarters of the initial plan and faces at least a couple of months of further negotiations until a final vote.
In the meantime, the Brazilian real and other Latin American currencies could get an extra boost from the unusually benign global outlook for emerging-market currencies.
Commodities prices have risen as the global economy picks up steam, and interest rates in the United States are still set to rise only slowly from their historically low levels.