A cautious optimism that the winner of Brazil's presidential elections will manage to rein in growing public debt will likely support the Brazilian real, the latest Reuters poll showed, even as uncertainty over the currency shoots through the roof. The real is likely to strengthen 2.2 percent in 12 months to 3.85 to the dollar, according to the median of 32 forecasts by market strategists and economists.
That is less than a third of the 9.6 percent appreciation predicted in last month's poll, but it would still take the currency far from all-time lows hit in August. The latest revision most likely reflects the real's 5.6 percent rally since that survey, which had estimated the currency at 3.79 rate in a year.
Still, the standard deviation of the forecasts, a common gauge of dispersion, jumped to the highest since Reuters began compiling that statistic in November 2014, a sign recent volatility is unlikely to fade anytime soon.
This suggests that though forecasters continue to coat their predictions with conditionals and what-ifs, a consensus is emerging that whoever wins the vote will tackle a painful social security reform investors consider critical to balancing the budget.
"To some degree, every candidate has acknowledged a need to cut government spending, if you are willing to dig through the heated campaign talk," Garde Asset Management chief economist Daniel Weeks said. "Still, nothing's set in stone when you're talking about politics." His perception seemed aligned with the wider market.
Sixteen economists who responded to an extra question said the most likely scenario going forward is a "slow fiscal reform," with an average 56 percent likelihood. A "fast fiscal reform" comes next at 26 percent, with only an 18 percent probability of "no fiscal reform." That painted a largely rosy picture just days before the first round of voting this weekend.
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