Brazil's currency will weaken only slightly over the next year despite a deepening political crisis, a Reuters poll showed, a sign of sustained market confidence in the country as it finally emerges from its worst-ever recession. The monthly survey of currency strategists also reiterated recent optimism about the Mexican peso, which has recovered most of the heavy losses caused by the surprise election of US President Donald Trump and is now expected to remain broadly stable over the next year.
The Brazilian real is expected to trade at 3.345 per US dollar in 12-months' time, nearly 4 percent weaker than Wednesday's closing, according to the median of 20 forecasts in the poll. That forecast is 2.9 percent weaker than the 3.25-per-dollar estimate of last month's poll. The revision, however, pales in comparison to the initial impact of a corruption scandal that implicated President Michel Temer two weeks ago.
On May 19 the real plummeted 8 percent following the first news on the scandal, the biggest percentage drop since the currency started to float in 1999. Temer has resisted calls for his resignation and appears more likely to stay in office through the end of his term in 2018 as allied parties failed to quickly agree on a name to replace him. Evidence that Brazil is growing again after a two-year-long downturn has also helped Temer. Output grew 1.0 percent in the first quarter, official data showed earlier on Thursday, the fastest expansion in nearly four years. Regardless of whether the president leaves or not, lawmakers and Finance Minister Henrique Meirelles have repeated that his market-friendly agenda will continue to move forward.
"We are seeing some short-term pressures but we expect a coordinated solution that keeps Congress with a reformist tone," said Marco Caruso, an economist with Banco Pine in S?o Paulo, making a reference to Temer's proposals to overhaul the pension system and the labor code. A separate Reuters poll of economists last week showed most analysts expecting Brazil to approve a pension reform this year and set a more ambitious inflation goal despite a near unanimous bet Temer would not serve his full term.
Elsewhere in Latin America, the Mexican peso is forecast at 19.1 per dollar in one-year's time, 2.5 percent weaker than at Wednesday's closing but slightly stronger than the 19.2-per-dollar forecast from last month's poll. Mexico has benefited from higher interest rates as the central bank tries to lower inflation from an over-eight-year high and as economic growth trumped expectations. The biggest risk for the Mexican peso seems to come from trade talks with the United States, analysts said.
For other currencies in the region there were only small revisions to their outlook compared with May's poll. "US monetary policy is likely to be less supportive for emerging markets over the coming quarters. But less protectionist rhetoric likely will ease pressures on longer-term economic prospects, sentiment and the outlook for Latin American assets," said Andres Abadia, senior international economist at Pantheon Macroeconomics. According to the median forecasts in the survey for the year ahead, strategists see the Argentine peso at 17.50, the Chilean peso at 680, the Colombian peso at 3002.5 and the Peruvian sol at 3.37 per dollar.
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