Latin American currencies will likely hold their ground in the face of global volatility, but remain exposed to domestic fiscal problems as well as uncertainty over the outcome of the US election later this year, a Reuters poll showed on Tuesday. The median estimate for Brazil's currency in 12 months was 3.75 per dollar, 1.9 percent stronger than in June's outlook.
The Chilean peso and the Peruvian sol also had stable or better forecasts. The Brazilian real gained 11 percent in June to its highest in almost a year as the central bank signalled it would hold interest rates at a whopping 14.25 percent for longer than expected to battle high inflation. Market players had expected Brazil to start cutting interest rates soon to help the country recover from its worst recession in decades. But newly appointed central bank head Ilan Goldfajn surprised investors last month by suggesting the benchmark rate would stay unchanged for months to come.
"The more hawkish tone from the Brazilian central bank, indicating the delay of the monetary policy easing, benefits the real in the short term," analysts at J.P. Morgan wrote. Brazil's large fiscal gap remains a threat for the real, though. Haitong Securities economist Flavio Serrano said he could downgrade his estimates for the currency unless there were signs of improvement in the country's public accounts. "Fiscal risks should generate at least some premium on the exchange rate," Serrano said. Brazil posted its largest-ever primary budget deficit for the month of May. The shortfall is expected to hit 170.5 billion reais ($53.52 billion) in 2016.
Interim President Michel Temer's plans to bring the deficit down next year have calmed investors' worries. But the success of his austerity drive is far from assured, requiring Congressional approval of unpopular legislation in a country roiled by political strife and corruption scandals. Opposing the brighter picture for the real, the median projection for the Mexican peso tumbled 4.0 percent to 18.2250 in one year. Estimates were compiled before Mexico's central bank hiked its rate by 50 basis points last Thursday. The move by Banxico, as the bank is known, sought to shore up the peso, which sank 5.8 percent in the second quarter as Brexit fears hit Latin America's most heavily traded currency. The peso picked up after the hike and has stabilised. Following the first shock waves after Britons' voted to leave the European Union, and with the US Federal Reserve increasingly forced to the sidelines on rates, Juan Carlos Alderete at Banorte-Ixe, said: "what could be complicated for the peso is the US election."