June 7, 2018 / 9:42 AM / 3 months ago

Uncertainty surges around Brazil, Mexico FX rates after selloff

BRASILIA (Reuters) - The Brazilian and Mexican currencies are set to strengthen, but forecasts from market strategists polled by Reuters span an extremely wide range, suggesting that expectations for an imminent rebound from a recent selloff may be premature.

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

Brazil’s real BRBY is now expected to strengthen 8.8 percent to 3.5 to the dollar in 12 months, according to the median of 26 estimates compiled June 4-5, compared to 3.4 in a previous poll. It is down over 16 percent since February.

Mexico's peso MXN=D2, battered down over 10 percent since April, is set to firm 8.6 percent to 18.83 to the dollar, up from 18.5.

Though seemingly small changes after both currencies plummeted almost 6 percent in May, the headline figures likely undersell the extent to which the shock is forcing forecasters to redo their math.

The standard deviation for Brazilian real estimates, a commonly used gauge of dispersion, soared to the highest since the monthly poll published in May 2016, when impeachment proceedings against former president Dilma Rousseff drove up uncertainty all around. The standard deviation for Mexican peso estimates reached a 15-month high.

This would suggest that forecasters are finally taking in a spike in U.S. bond yields, growing chances of a trade rift between the United States and Mexico and a lower likelihood that the winner of Brazil’s elections this year will manage to cut government spending, after taking those risks in stride for months.

“Some strategists are probably waiting until things calm down before revising their forecasts, but there’s no denying that the dollar spike was much faster than nearly anyone expected,” Mizuho Securities chief strategist Luciano Rostagno said. “This could be just the first step of a larger wave of revisions.”

Rostagno himself revised his forecasts for the real after a nationwide truckers’ strike against high diesel prices in the final weeks of May forced the government to introduce diesel subsidies even as it struggles to plug a growing budget deficit.

The strike drove several economists to downgrade estimates for gross domestic product growth and raise inflation forecasts.

More importantly, however, it may have exposed the frailty of forecasters’ repeated assurance that the winner of this year’s presidential elections, set to be the most hard-to-predict in decades, would maintain a platform of spending cuts, privatizations and deregulation.

“Public opinion proved to be very favorable towards the strike, which shows that the population does not endorse an agenda of reforms. This is concerning as Brazil is in a delicate fiscal situation and reforms are needed to drive public debt back to a sustainable path,” Rostagno said.

A recent poll showed this year’s race dominated by the right and the left, with law-and-order lawmaker Jair Bolsonaro as a clear frontrunner followed by populist Ciro Gomes. Centrist candidates seem to be struggling to take off.

Mexico is also facing its own presidential elections which have given investors reason to pause.

Nationalist Andrés Manuel López Obrador, who has drawn opposition from some in the business community for his plans to revise oil contracts and an airport under construction in Mexico City, remains a clear frontrunner, but the composition of Congress is all but a question mark.

Meanwhile, U.S. President Donald Trump seems increasingly bent on scrapping the North American Free Trade Agreement (NAFTA) and turning instead to bilateral negotiations, raising the threat of U.S. protectionism that forecasters had largely brushed off in several Reuters polls.

That drove strategists at Nomura Securities to recommend in a recent report that clients bet on weakness in the Mexican peso when compared to the Colombian peso, saying those risks are “likely to either compound any selloff pressure or cap any rally potential in the MXN coming from shifts in external risk sentiment.”

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

Reporting by Bruno Federowski; Additional reporting by Sheky Espejo in Mexico City, Hernan Nessi in Buenos Aires, Nelson Bocanegra in Bogota, Ursula Scollo in Lima and Felipe Iturrieta in Santiago; Editing by Bernadette Baum

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