Poll: Market intervention, politics cloud outlook on Latin America FX

BUENOS AIRES/BRASILIA (Reuters) - Latin American currencies are likely to remain volatile after a surprising recovery last month, with Brazil’s political crisis still hurting the real and the Mexican peso clouded by signs of economic deterioration, a Reuters poll showed on Thursday.

A woman walks past a currency exchange office in Sao Paulo, Brazil, January 7, 2016. REUTERS/Nacho Doce

The Brazilian currency BRL= is forecast to drop almost 3 percent to 4.01 per dollar by the end of March, by 6 percent in three months and 8 percent in a year, according to the median forecast of 27 currency strategists.

Fraught with worries over the future pace of interest rate hikes in the U.S. and depressed commodity prices, the real and the Mexican peso MXN= are still exposed to more ups and downs, with nine respondents in the poll anticipating the same volatility as in February.

The range of estimates also widened from last month’s poll, suggesting greater uncertainty.

However, as in other emerging markets covered by Reuters surveys, the wider ranges also reflect growing bets of a recovery against the U.S. dollar, suggesting the three-year-long currency rout may be losing steam. [EM/POLL]

The real got a lift in recent days, helped by a recent improvement in Brazil’s trade data that alleviated its financing needs. However, the reprieve may be short-lived as President Dilma Rousseff struggles with market anxiety over her fiscal discipline and opposition moves to impeach her.

“The real has been driven by political developments and medium-term concerns about debt sustainability, which should remain present in the foreseeable future,” Barclays analysts wrote in a report. The bank pegged the currency at 4.20 per dollar in one month and a record low of 4.50 in early 2017.

Brazil’s economy took its steepest plunge in a quarter century last year, contracting by 3.8 percent, according to official data published on Thursday.

The Mexican peso MXN= is forecast to fall 1 percent to 17.98 per dollar in one month, regaining tentatively to 17.80 in three months and 17.55 in one year. It was one of the worst performers at the start of 2016 due to the oil price slump and fears about the Chinese economy that have hurt risky assets.

The peso came back from its weakest levels on record above 19.0 in mid-February when authorities announced a surprise interest rate hike, a new intervention policy and budget cuts aimed at defeating speculators that had put it on the ropes.

Yet a lack of clarity regarding future fiscal austerity and likely downward adjustments to official growth estimates “may pose an additional risk for the peso in an already complex global scenario for emerging currencies,” said Jesus Lopez, from Mexican bank Banco Base.

The Chilean peso CLP= is set to follow the decline of the region's majors, according to median projections. Copper prices are not expected to rebound too much and growth in Chile could remain slow, wrote analysts at 4Cast. "Recent strength is unlikely to last long as domestic fundamentals are weak".

The same combination of global headwinds and domestic issues applies for the peso of Colombia COP=, said Juan Pinzon at Profesionales de Bolsa in Bogota.

“Expected sovereign debt ratings downgrades and lower oil production in the country will add pressure on the exchange rate.”

Median forecasts for the Chilean and the Colombian pesos within 12 months were at 715.0 and 3320.0 per dollar, respectively.

Additional reporting by Nelson Bocanegra in Bogota, Miguel Gutierrez in Mexico City and Felipe Iturrieta and Anthony Esposito in Santiago; Editing by Ross Finley and Bernadette Baum