The Brazilian real is unlikely to weaken much further in coming months after an October sell-off that resulted in the currency's biggest monthly loss in 11 months, the latest Reuters poll of economists and strategists predicted. Market observers continue to take 2018 elections, the most wide-open in decades, in stride even as it looks less likely that President Michel Temer will deliver on promises to cut government spending.
Those surveyed expected the real to trade flat at 3.26 per dollar in six months, before weakening 1.4 percent in 12 months. That was a sharp reversal from the previous survey, which indicated the real would drop 2.3 percent in six months and 4.3 percent in 12 months. Thomson Reuters StarMine's SmartEstimate, which weighs Reuters Poll FX forecasts according to past performance, shows the currency even firmer at 3.29 in twelve months, only a tad weaker than its 3.2763 Tuesday close.
The results suggest the real was finally approaching fair value. Santander economists said the currency was "priced to perfection" following its October sell-off, as investors priced in the likelihood that the government would not pass a constitutional amendment to streamline Brazil's social security system. Several economists said the pension reform bill was key to controlling government debt and boosting long-term economic growth.
Temer managed to dodge corruption charges for a second time last month but a smaller show of support from lawmakers suggested his political capital was thin. That could transfer the burden of government budget cuts to his successor, which is far from a safe bet given Temer's austerity efforts contributed to driving his approval rates to single digits. Financial markets have seemed to brush off chances the elections will derail the reform agenda, but a steep yield curve suggests some investors may be getting cold feet.