June 4, 2020 / 12:25 PM / a month ago

Latam FX to hold recent gains, but depend heavily on calmer politics - Reuters poll

BUENOS AIRES (Reuters) - Major Latin American currencies are expected to retain recent gains against the U.S. dollar, subject to calmer domestic politics and signs of economic recovery, a Reuters poll of foreign exchange analysts showed.

FILE PHOTO: A board displays the Real-U.S. dollar and several foreign currencies exchange rates in Sao Paulo, Brazil January 8, 2019. REUTERS/Amanda Perobelli

Their optimism is striking in light of the human tragedy in the region from the coronavirus pandemic, which could upset local markets again if the already-high death toll rises further and fuels more political strife and economic damage.

Brazil's real BRBY and the Mexican peso MXN= are expected to trade only slightly softer for the rest of 2020, holding most of a partial recovery after crashing to record lows in March in a global market sell-off of risky assets.

The real is seen at 5.20 per U.S. dollar in six months, near Wednesday’s levels, according to the median view of 34 analysts polled June 1-3, as the worst of the health crisis and a recent political flare-up in Brazil seem to be already priced in.

“Some of the most immediate threats for the government are postponed for now,” said Victor Beyruti, an economist at Guide Investimentos. “We also expect parts of the economy to begin reopening in June”

Politics continue to dog Brazilian assets. A Supreme Court judge this week shelved a request by political parties to seize President Jair Bolsonaro’s cellphone in an investigation on whether he tried to meddle with law enforcement for personal reasons.

Bolsonaro urged his supporters to put off protests against the court after counter-demonstrations triggered violent clashes. Opposition leaders accuse him of undermining democracy by encouraging his side.

Eighteen out of 22 respondents said they viewed political and election risks as negatives for Latin America’s currencies. Others saw them as neutral.

Ten out of 19 respondents to another question said risks to Brazil’s currency - which fell 20.8% in March-April and has since recovered 11.7% - were tilted upward, while seven saw them pointing down and two viewed them as neutral.

A year from now, the real is forecast at 5.00 per dollar implying a 1.2% appreciation over Wednesday’s rate and 4.0% weaker than the median 12-month estimate in May. The currency is down 20.4% so far in 2020.

The outlook for Mexico’s peso reflects some depreciation in coming months, with the median estimate pegging it at 22.50 in 12 months, down 4.1% from Wednesday but 12.6% stronger than the lifetime lows in March.

As a historic recession takes hold in Mexico, the region’s No. 2 economy after Brazil, President Andres Manuel Lopez Obrador’s government faces growing worries it may struggle with refinancing the nation’s debt at some point in the future.

“Domestic economic problems in Mexico might trigger the removal of Mexican sovereign investment grade status in the medium-to-long run, thus providing a weaker bias to our MXN call,” said Mauricio Nakahodo, an economist at MUFG.

(For other stories from the June Reuters foreign exchange poll:)

Reporting and polling by Gabriel Burin in Buenos Aires; Additional polling by Miguel Ángel Gutiérrez in Mexico City; Hari Kishan and Sumanto Mondal in Bangalore; Editing by Ross Finley and Richard Chang

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