Latin American currencies are set to weaken over the next 12 months despite recent signs of market appetite for high-yield assets, a Reuters poll showed. The survey of more than 50 strategists and economists suggested for a second straight month that the recent rally of the Brazilian real and other currencies in the region has not set a long-lasting trend.
Soft economic growth in Latin America and prospects of reduced liquidity in global markets will eventually discourage many investors now taking advantage of higher interest rates in the region, especially in Brazil, according to the survey. The Brazilian real is expected to trade at 2.47 per dollar in 12 months, 8 percent weaker than Tuesday's close at 2.2615, the median forecast of 34 economists showed.
Colombia, Chile and Peru currencies are also expected to weaken between 2 and 4 percent in 12 months. Mexico's peso is the only major Latin American currency expected to rise, but forecasts were revised down from last month's poll, a further sign of caution toward the region.
"Recent FX strength across Latam is unwarranted by fundamentals, specifically weaker than expected growth in Mexico and concerns about fiscal performance in Brazil," said Blue Macellari, senior strategist at TD Securities in New York. The bearish outlook is similar to that of other emerging currencies such as the Turkish lira and the South African rand, which are also expected to weaken even as prospects for higher borrowing costs in the United States appear to be mostly priced in.
"LatAm currencies should keep a (weakening) trend as the (US) taper goes on and global liquidity decreases," said David Beker, chief Brazil economist and fixed income strategist at Bank of America Merrill Lynch, in Sao Paulo. Latin American currencies have strengthened over the past two months following a brief sell-off in the beginning of the year, when fears of a sharp slowdown in China triggered a sudden capital flight from emerging markets.
Analysts say the recent gains are partly explained by the unwinding of the short positions built up in January. But data showed they have also been supported by hefty capital inflows, suggesting a more solid background for the currency moves despite the pessimism prevailing amongst strategists. Brazil, which is expected to raise interest rates by a ninth straight time later on Wednesday, received over $5 billion in capital inflows in the first three weeks of March - reversing nearly half of last year's total outflows. Part of these inflows were linked to carry trades funded in Japan and Europe, a strategy that thrives only when market volatility is low.