Latam currencies to weaken slowly

Latin American currencies will slowly weaken in coming months as global central banks try to drive up inflation by keeping interest rates low, a Reuters poll found on Thursday. The survey highlights how rich countries struggling to spur growth and inflation have become a blessing for emerging markets, which have benefited from steady investor appetite despite uncertainty ahead of presidential elections.
Monetary stimulus in developed economies should bolster the allure of high-yielding emerging market currencies, cushioning their decline. "The positive fundamental story surrounding emerging market currencies remains in place," strategists at Societe Generale wrote in a report. Markets "will continue to flourish as long as policy tightening remains slow and predictable."
Two Federal Reserve policymakers on Tuesday warned against further US rate hikes until they are confident inflation will rebound. Their remarks followed months of falling or flat inflation which has left investors skeptical of the Fed's plan to hike again this year. Meanwhile, the European Central Bank has repeatedly reassured investors it would gradually scale back stimulus as inflation remains well below its target. Mexico's peso is seen at 18.15 per dollar in 12 months, according to the median of 20 forecasts, a tad weaker than last month's poll.
The slight outlook change comes even after the peso underperformed other regional currencies in August as US President Donald Trump threatened to scrap the North American Free Trade Agreement (NAFTA), reigniting concerns over US protectionism. Former Mexico City Mayor Andres Manuel Lopez Obrador's lead in polls ahead of the 2018 presidential elections has also given investors pause.
His victory could mark a shift toward left leaning policies in Latin America's second-largest economy, where centrist technocrats have held sway for decades. This could further complicate relations with the United States. Four of the five economists who answered an extra question said risks are skewed toward a weaker peso. Accordingly, a Reuters calculation that gives extra weight to top forecasters indicates the peso could trade lower than the median estimate suggests.
"Higher interest rates and the stronger fiscal position should help limit the peso's sell-off and, ultimately, the impact of the peso's chief medium-term risks: the NAFTA update and the final outcome of the 2018 presidential race," ING economist Gustavo Rangel said.