More Latam FX pain due in April

Latin American currencies are set to stay weak this month as the regional economic damage caused by the coronavirus pandemic becomes more clear, according to a Reuters poll of strategists who remained optimistic about an eventual rebound.

The Mexican peso and the Brazilian real careened to record lows at the end of March, and are down about 22% and 24% so far this year, respectively. Investors dumped them for the safer US dollar on fears company closures and lockdown steps all around the globe would wreck the economy.

The peso is now forecast at 23.80 per dollar in 30 days, still close to its lifetime low at 25.4440 of March 24, according to the median estimate of 17 foreign exchange strategists and analysts polled March 27-April 1. "The currency will continue under pressure as economic data confirm a decline due to the COVID-19 shock, and the drop in oil prices will strain public finances," said Alain Jaimes, an analyst at Signum Research in Mexico City. COVID-19 is the disease caused by the novel coronavirus.

Latin American economies are falling into recession but traders are worried worst-case scenarios may materialize in coming weeks, including projections for massive fiscal deficits that could add salt to the wounds of the region's currencies. Extra spending to fight the virus threatens to capsize strained public budgets that were already challenging Mexican President Andres Manuel Lopez Obrador and his Brazilian counterpart Jair Bolsonaro before the health crisis.

In a possible prologue of future trends, the peso's losses widened last week after Standard & Poor's cut Mexico's credit rating, citing increasing pressure on the government following a hit to state oil firm Pemex from plunging crude prices.

The real has also been pounded by concerns over Brazil's "war budget" against the coronavirus that is now worth 2.6% of gross domestic product and will grow further, according to Economy Minister Paulo Guedes.

"The risk factor lies in fiscal policy, which due to the state of public calamity, allows the Brazilian government to spend more and not fulfill the (budget) ceiling in 2020," said Vitor Vidal, an economist at LCA consultancy in Sao Paulo.

The Brazilian currency is seen at 5.10 per US dollar in one month, near this week's record lows beyond the mark of 5.25. The forecast assumes a positive effect on the real from a continuation of dollar sales by the central bank.

The war chest of the BCB, as the bank is known, stands at an ample total of $345.6 billion. However, officials will likely remain prudent about its use after a drain of more than $20 billion only in March due mainly to FX intervention.

Longer-term estimates in the survey pointed to a significant recovery in one year, with the peso potentially appreciating 10.9% to 22.00 per dollar and the real gaining 16.9% to 4.50 per dollar, assuming a recovery in Latin America's top economies.

Still, the pandemic and its impact are set to leave a lasting mark on the region's currencies. April's 12-month forecasts were for the peso and the real to weaken 11.4% and 8.9% from March, respectively.