Worst of Latam FX selloff likely over, but conviction brittle

Brazil's and Argentina's currencies should recover from a sell-off to multi-year lows, the latest Reuters poll showed, but forecasters have grown much more tentative due to rampant volatility. The Brazilian real is set to strengthen 9.6 percent to 3.79 to the dollar in 12 months, according to the median of 30 estimates from economists and strategists compiled August 31-September 4 as part of a regionwide Latin American monthly poll. The consensus in the previous surveyed pointed to a stronger rate, of 3.60 to the dollar.
Local factors, such as Brazil's unpredictable presidential elections and soaring inflation in Argentina, are magnifying the effect of widespread risk aversion on Latin American markets as escalating trade tensions between the United States and other major economies threaten to deal a blow to global growth.
This would make the forecast revisions look surprisingly small after wariness over October's presidential elections and an emerging-market rout drove the currency's worst monthly performance in three years. Yet that figure likely understates how forecasters are scrambling to update estimates in the wake of the slump. The standard deviation of the forecasts, a commonly used gauge of dispersion, soared to the highest since May 2016, surpassing a peak reached in June.
Three forecasters who regularly participate in Reuters' foreign exchange polls asked not to be included this time around, either because they were still redoing their math or did not want to commit to a view. The currency has been trading at a weaker rate than expected by every respondent who provided end-August forecasts since last year. Even Austin Rating's Alex Agostini, who came closest to correctly predicting the real's move three months ago, downplayed his achievement.
Agostini forecast the real will hover at 4.00 to the dollar for the time being, adding that this was more of a guess than a rigorous forecast. Most strategists who did put themselves on the line provided some sort of weighted average based on the likelihood of each candidate winning. But only two of 30 predicted a weaker rate than the current 4.17 in 12 months, suggesting a consensus that at least some belt-tightening is on the horizon.
In contrast, forecasts for the Argentine peso ran all over the place, ranging from 28.92 to 42 compared to the current 39.25. Not a single forecaster who had also participated in the August poll revised their prediction to show a stronger peso, though the median of 10 estimates suggested the currency is still likely to appreciate 13.9 percent to 34.135 in a year's time, up from 31 percent previously.