Latin American currencies look set to slow their downward slide in early 2016 as central banks raise interest rates to deflect any potential turmoil from the US Federal Reserve's own expected lift-off in a few weeks, a Reuters poll showed. The battered Brazilian real should weaken past 4 per dollar again, but only slightly. It is expected to fall to 4.025 per dollar in six months and 4.09 in 12 months, according to the median of 31 forecasts from foreign exchange strategists.
In roughly six months, the Mexican peso was projected at 16.8150, the Chilean peso at 715.0 and the Colombian peso at 3,050.0. "Regional currencies have weakened significantly in 2014-15, and we expect further weakness in 2016," Goldman Sachs economists wrote in a note. They pointed to slow growth, high inflation and low commodity prices as causing the upcoming "moderate" decline.
Rising yields in US Treasuries and dollar strength resulting from what is expected to be a series of gradual Fed rate increases should keep downward pressure on Latam currencies, the economists said. Brazil's political crisis and its deep recession are the main local worries, but analysts say investors and traders also should be wary of both Mexico's and Colombia's exposure to weak oil prices.
Still, future losses in Latin America ought to be much less painful than in 2015, given how far and how violently some currencies have already fallen. The real, which has plunged more than 30 percent this year, should fall just 3 percent in the first five months of 2016, the poll showed. The Mexican peso would trade virtually flat with an expected 16.7750 at the start of 2016, reaching 16.50 in 12 months. The calmer outlook comes as the region's currency markets have stabilized after a third-quarter rout, when the real led the free fall on investor fears about the willingness of Brazil's central bank step in.
Authorities ultimately reacted to prop up their currencies, and that intervention is likely to continue, Capital Economics said in a report. "The lagged effects of currency weakness will keep inflation elevated and force central banks in most countries to tighten monetary policy," the report said. In Brazil, yields on the country's interest rate futures contracts have jumped on bets that the central bank will raise the Selic benchmark rate in January from an already high 14.25 percent despite the recession.
In Mexico, the debate is about how long it will take for Banxico to follow the Fed in raising interest rates. But the road ahead could be more rugged than what the poll's median figures suggest. Nine respondents saw risks skewed to the downside for the Latin American currencies, notably for the real. One global bank pegged the Brazilian currency, considered the most vulnerable, at 4.40 in six months.