February 8, 2018 / 7:33 AM / 6 months ago

LatAm currencies to emerge unscathed from stock market rout

BRASILIA (Reuters) - A strong outlook for global economic growth is likely to guide Latin American currencies safely through the recent turmoil in global financial markets, the latest Reuters poll showed.

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

Strategists and economists polled by Reuters either strengthened or maintained their forecasts for five of the six regional currencies, even as world stocks suffered their biggest selloff in six years earlier this week.

The two main currencies in the region, the Brazilian real BRBY and the Mexican peso MXN=D2, are set to trade at 3.35 and 18.6 to the dollar in a year, respectively, unchanged from the January poll.

That underscores the view that the ructions in equity markets have had very little impact on the much larger global bond and foreign exchange markets.

The currencies of Chile CLP=CL, Colombia COP= and Peru PEN=PE are all expected to trade at slightly stronger levels than previously forecast, according to the Feb. 1-6 Reuters poll.

This suggests that sharp losses seen last week are unlikely to hold as economic growth strengthen both at home and abroad.

“At the end of the day, faster growth is the main story, much more than the debate over whether U.S. rates will rise two, three or four times this year,” said Banco J. Safra chief economist Carlos Kawall.

Data last week showing a solid annual rate of increase in U.S. wages, driven by higher paid workers, kindled a jump in U.S. Treasuries yields that helped trigger a global stock market rout.

Higher U.S. rates could drain funds away from emerging markets, which tend to offer higher yields. Still, moves in Latin American currencies have been somewhat limited.

In a report, Morgan Stanley estimated that the Brazilian real, the Mexican peso, the South African rand ZAR= and the Turkish lira TRY= have historically weakened around 2 percent for each 4 percent decline in the S&P 500 .SPX.

But Brazilian and Mexican currencies lost only slightly more than 2.3 percent while the S&P 500 dropped 6.1 percent between Friday and Monday, a disparity that Morgan Stanley attributed to a “stronger fundamental position of EM macro.”

An improved outlook for Latin American economies, as highlighted by a recent Reuters poll, should cushion their currencies from major volatility ahead of major elections in the region. [ECILT/LTAM]

Voters will decide in Brazil in October on President Michel Temer’s successor. Temer, whose approval rates have tumbled due to corruption accusations, has pledged not to run, casting a shadow on the continuity of his austerity efforts.

Temer’s administration has struggled to gather support for a bill cutting social security spending, which investors see as key to curbing growth of public debt and boosting long-term growth. But it could increase the burden on his successor.

Should the new president unwind Temer’s measures to cut red tape and privatize state companies, Brazil’s real would trade closer to 3.50 to the dollar, said Jason Vieira, chief economist at Infinity Asset.

Still, Vieira does not expect that to be the case, particularly after an appeals court upheld former President Luiz Inácio Lula da Silva’s conviction for corruption.

Lula, who has sharply criticized Temer’s policies, has been leading voting intention polls but could be barred from running.

Meanwhile, nationalist candidate Andrés Manuel López Obrador continues leading polls in Mexico, stoking concerns of increased tensions with U.S. President Donald Trump’s administration as trade talks drag on.

A recent Reuters poll showed the peso would take a bigger hit if Trump killed the North American Free Trade Agreement than from an election victory for Obrador. A combination of both would drive the peso to near record lows, the survey showed.

(Other stories from the February Reuters global foreign exchange poll:)

Reporting by Bruno Federowski; Additional reporting by Hernan Nessi in Buenos Aires, Nelson Bocanegra in Bogota, Ursula Scollo in Lima and Felipe Iturrieta in Santiago, editing by Larry King; Editing by Ross Finley and Jeffrey Benkoe

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