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Brazil's real will turn more unstable as it becomes increasingly exposed to a pending discussion of a plan to overhaul the social security system that is proving hard to sell in a divided Congress, a Reuters poll showed. The 12-month forecast for the Brazilian currency was pegged at 3.70 per dollar, according to the median estimate of 19 analysts surveyed April 29-May 1, 5.9 percent stronger than this week and unchanged from April's projection.
"We expect much headline risk and market volatility in the coming months as pension reform makes its way through the special committee," said the team of emerging market strategists at Citi in a report last week.
President Jair Bolsonaro, elected in October, is struggling to gain traction for his flagship legislation. The last attempt to pass a pension reform failed in 2017, when a corruption scandal derailed the previous government's agenda.
The bill's process has already been far from smooth, and the legislation is expected to undergo more debate and probable changes in negotiations at a special panel in Congress, where senior lawmakers want to approve it by June.
Reflecting a potential rough patch in the near future, the survey predicted the real would trade relatively soft close to 3.80 until the end of July, before appreciating into year end on hopes of success on the retirement issue.
In a separate question of the poll, nine out of 11 respondents said they saw downside risks for the currency, keeping last month's negative bias. Local markets turned skittish in March after celebrating Bolsonaro's win last year.
The real has been on a downward trend in recent weeks, losing approximately 7.0 percent from February's most robust level as government intentions met with harsh political realities.
For different reasons, a degree of sustained uncertainty also surrounds the prospects for the Mexican peso despite some strengthening in analysts' projections compared with last month's poll.
Mexico's currency is forecast at 19.7850 per dollar in one year, 1.5 percent more solid than in April and 4.3 percent softer than this week. But markets worry about President Andrés Manuel López Obrador (known as AMLO) and his economic strategy.
"There is a risk that President AMLO responds to weaker growth by loosening fiscal policy, which would spook investors and cause a sell-off in bonds and the MXN," said Edward Glossop, emerging markets economist at Capital Economics.

Copyright Reuters, 2019

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