November 1, 2018 / 2:56 PM / 16 days ago

Brazil's real rally already over after Bolsonaro presidential victory: Reuters poll

BRASILIA (Reuters) - The Brazilian real is expected to hold at its current level in the coming months, the latest Reuters poll showed, after the victory of far-right lawmaker Jair Bolsonaro in the presidential elections ended a currency sell-off.

Brazilian real notes are seen at the Bank of Brazil Cultural Center (CCBB) in Rio de Janeiro, Brazil November 17, 2017. REUTERS/Pilar Olivares

That potential result would come after strategists and economists spent months arguing that the currency was either excessively cheap or over-valued.

After a sharp rally drove the real to five-month highs, poll respondents said investors in currency markets seem well-attuned to the current outlook of cautious optimism on fiscal reforms, balanced by concerns over Bolsonaro’s commitment to a free-market agenda and his ability to win support in Congress.

“The candidate with the market-friendly talk won, but there are clear governance challenges that have to be solved. There is no room for an extended honeymoon,” Goldman Sachs economist Alberto Ramos said.

The Brazilian real BRBY is likely to weaken a tad to 3.75 to the dollar in 12 months, according to 30 estimates compiled Oct 29-31, compared with 3.72 at Wednesday’s close.

That compared to a weaker forecast of 3.85 to the dollar in the previous poll, a sign of fading risks after Bolsonaro beat rival Fernando Haddad in last month’s election.

Analysts and investors widely believed Haddad would hesitate to pursue privatizations, deregulation and spending cuts needed to curb a growing deficit.

Thirteen of the 20 respondents who participated in both polls revised their forecasts to show a stronger real a year from now. Four kept their predictions and only three cut them.

But that is more likely evidence that investors have adjusted their positions to the risks around the currency than a sign that volatility is over.

The standard deviation of forecasts, a commonly used gauge of dispersion, came in just slightly below that of the October survey, when it reached the highest since Reuters began compiling the statistic in November 2014.

Estimates ranged between 3.2 and 4.65 to the dollar, almost in line with results from the previous poll that suggested that the Brazilian real would take a stronger hit from disappointment over reforms than positive surprises would lift it.

Such widespread expectations underscored how much still hangs in the balance for Latin America’s largest economy after the divisive presidential election was marked by violence, verbal attacks between candidates and little debate on policy.

SANGUINE ON MEXICO

In contrast, poll respondents were largely sanguine on the prospects for the Mexican peso MXN=, even after the cancellation of a partly built new airport in Mexico City triggered a sell-off.

The peso lost 4.8 percent this week through Wednesday after President-elect Andres Manuel Lopez Obrador decided to heed the results of an informal referendum that called for abandoning the current project in which billions of dollars have already been invested.

Fitch Ratings warned of a 50-50 chance of a downgrade to the country’s sovereign ratings, fearful that Obrador could undermine economic reforms, such as the outgoing government’s opening of the oil and gas sector to private capital.

Meanwhile, the Mexican central bank is now expected to hike rates to curb currency outflows.

The peso is expected to strengthen to 19 to the dollar in 12 months, based on the median of 23 forecasts in the Reuters survey, slightly weaker than the previous forecast of 18.835 but 7 percent stronger than Wednesday’s close.

Seven of 12 forecasters who also participated in the October survey cut their one-year estimates, but three predicted a stronger currency and two maintained them.

“Mexico has been all but downgraded to Banana Republic status by the international financial community,” XP Investimentos strategists wrote in a report.

“We do think that Mexican asset prices will find a new equilibrium at some point, and interesting opportunities will arise. But we think that markets will need to live through some catharsis before we get there.”

As the two largest Latin American markets, Mexico and Brazil to a large extent compete for speculative foreign capital. In September, the peso posted its worst monthly decline against the Brazilian real since 2003.

Reporting by Bruno Federowski; Editing by Jeffrey Benkoe

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