POLL-Brazil real, Chile peso the sole shafts of light in LatAm FX gloom
By Jamie McGeever
BRASILIA, Nov 7 (Reuters) - Latin American currencies will mostly weaken in the months ahead as political uncertainty and economic caution grip the region, a Reuters poll showed on Thursday, with the Brazilian real and Chilean peso the only ones expected to recover later next year.
Mexico's peso is likely to slide to 20.00 per dollar as the economy struggles to grow and inflation persists, complicating life for the central bank, while the Argentine peso will steadily hit new lows with no rebound in sight, according to estimates in Oct. 31-Nov. 5 poll.
Domestic politics, worries over the U.S.-China trade war, longevity of the record U.S. expansion, and uncertainty ahead of the 2020 U.S. presidential election will hang over Latin American currencies in the coming months.
In terms of magnitude, the biggest mover on the upside is expected to be Chile's peso, rising about 7% over the next year as recent social unrest and protests against the government die down, while Argentina's political and economic problems will continue and send the peso tumbling another 32%, the poll shows.
Brazil's real BRBY and Mexico's peso MXN=, meanwhile, show a divergence opening up between the region's big two currencies over the next year.
Investors are cautiously optimistic Brazil's government will progress on its economic reform agenda of reducing public spending, selling off state assets, and opening up the economy to the private sector and foreign capital inflows.
"The real was undervalued ... with foreign investors possibly on hold, waiting for stronger signals of fiscal commitment from the government," Rabobank analysts wrote in a note last week, referring to the real's recent weakness.
"That said, the current level of the real appears to be much more in line with the projected path extracted from our models," Rabobank added.
According to the median estimate of 25 currency strategists, Brazil's real will tread water around 4.00 per dollar for the next three months before strengthening to 3.95 in six months and 3.90 in 12 months.
That would be 4.3% stronger than its intraday value on Wednesday, but still significantly weaker than the 4.00 per dollar analysts had projected earlier this year before pension reform was approved.
Mexico's peso, on the other hand, is expected to drift in the opposite direction over the next year.
Growth momentum is slowing yet inflation is not coming down quickly at all, meaning the central bank's ability to cut interest rates is more limited than it is in Brazil.
The economy only grew 0.1% in the third quarter and shrank 0.4% over the same period a year ago, preliminary figures showed last week, both much weaker than economists had expected.
This should help accelerate the pace of monetary easing next year to bring the policy rate closer to "neutral levels" around 6.25% from 7.75% currently, Barclays analysts wrote in a recent note.
But BofAML economists note that core inflation, running at 3.75% and barely changed over the past 18 months or so, means the central bank will have great difficulty in reducing its policy rate by the 175 basis points over the next year currently priced into rates markets.
The median forecast of 21 FX strategists in the Reuters poll shows the Mexican peso will weaken to 20.00 per dollar over the next 12 months, although none expect it to slip beyond 21.0, an upper limit that has held firm for three years.
The median forecast of 22 strategists shows the peso weakening to 19.6950 per dollar over the next three months. In July, it was projected to finish the year at 19.6 per dollar.
The loser in the short- and medium-term will be the Argentine peso, according to analysts, as investors and markets await signals from President-elect Alberto Fernández about the future direction of Latin America's No. 3 economy.
Fernández will face a full array of economic tasks when he takes office in December, including protecting reserves and dealing with a looming pile of debt amid complex negotiations with creditors and the International Monetary Fund.
"The financial road ahead is quite challenging," BofAML analysts wrote in a report last week.
According to the Reuters poll, the peso is expected to hit fresh low after fresh low over the next 12 months, culminating in a median estimate of 87.90 per dollar.
(Reporting and polling by Gabriel Burin in Buenos Aires; writing by Jamie McGeever; editing by Steve Orlofsky)
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