Further weakness in the Mexican peso is no longer a sure bet after a two-month selloff drove the currency to three-month lows, the latest Reuters poll of market strategists showed, although other Latin American currencies are expected to fall. Uncertainty over the currency's path looms large, with forecasts more spread out than in previous polls as talks with the United States on trade drag on ahead of next year's Mexican presidential election, which looks set to be hotly-contested.
The peso is forecast to strengthen 0.4 percent to 18.185 per dollar by year-end, according to the median of 23 estimates collected October 2 to October 5. The most accurate forecaster over the past year providing rolling 3-month estimates, Banco Base, saw it firming to 18 per dollar, suggesting the currency's 2.5 percent drop in the last two months may have been overdone, at least for now.
The peso is expected to have firmed to 18.21 per dollar in a year's time, a tad stronger than the current 18.26 exchange rate but a little weaker than the 18.15 rate forecast in last month's poll. Estimates ranged from 16.80 to 20, underscoring the potential for both upward and downward surprises. The standard deviation, a gauge of forecast dispersion, reached 0.75, compared to 0.50 in the previous survey.
Scotiabank economist Mario Correa said volatility is in order as investors looking to forecast the peso's value "juggle" the outlook for a strong economy and, potentially, some interest rate cuts against heavy uncertainties surrounding trade negotiations and the elections. "We are approaching times of decisive events for financial markets," he said. Talks between the United States, Canada and Mexico to revamp the NAFTA trade agreement may run into 2018, officials have said, beyond an end-December deadline designed to avoid Mexico's federal elections campaign set to start in March.
Fears the renegotiations could lead to increased US protectionism, which purchases over three-quarters of Mexican exports, have led the Mexican peso to underperform its regional peers in recent months. Nevertheless, even the most pessimistic forecaster expected the currency to remain far from the 22 per dollar all-time low reached in January. A Reuters poll last month suggested the peso could even appreciate as a result of the trade talks.
Currency strategists remain uneasy over next year's elections, which are looking to be the most fragmented and difficult to predict in years. In a report, economists at Nomura Securities said investors are understating the potential impact of a trade shock or the elections. They estimated a termination of NAFTA could drive the peso to 20.06 to the dollar, while an Obrador victory would drive it to 19.57. Should both these events happen, the currency would reach 20.83, they wrote.
By contrast, the Brazilian real is expected to weaken in coming months as central banks in developed economies tighten monetary policy, reducing the allure of high-yielding assets. The real is seen at 3.27 to the dollar in 12 months, 4.3 percent weaker than the current rate but stronger than the 3.35 rate seen in last month's poll.
Strategists have generally been less concerned with Brazil's presidential elections next year even though they may determine the fate of an agenda of structural reforms which they see as critical to boosting long-term economic growth. Millions of Brazilians were lifted from poverty during Lula's 2003-2010 presidency. Still, many blame the heavy spending spearheaded by his successor Dilma Rousseff, who served as his chief of staff, for Brazil's recent economic woes.
But Lula, who has been convicted for corruption, may be barred from running if a higher court upholds his conviction. The Colombian peso is expected to trade at 3,065, the Chilean peso at 635, the Argentine peso at 18.2 and the Peruvian sol at 3.33 in 12 months.
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