Latam FX to remain weak on loose monetary policy, Argentina fears: Reuters poll

By Gabriel Burin

BUENOS AIRES (Reuters) - Latin America's top currencies are poised to remain weak in coming months as central banks in Brazil and Mexico keep on easing to revive growth, with worries over Argentina's financial problems adding to a softer trend, a Reuters poll showed.

Views that the real (BRBY) and peso were losing their allure as high-yield bets gained ground when both currencies fell to their lowest levels of the year after a string of disappointing data in Brazil and Mexico prompted rate cuts.

The Brazilian currency is now expected to trade at 3.825 per U.S. dollar in one year, according to the median estimate of 24 currency analysts polled Aug. 29-Sept. 4. Seemingly stronger at first look, the forecast may actually point to softness ahead.

While the median figure implied a 9.0% appreciation from Tuesday, it was 2.2% weaker than the 12-month estimate for the real in August and the most pessimistic prediction since last December.

The downgrade reflected a change of heart about the real's fate despite not going as far as pegging it at its present value below 4.0 per dollar, a move that would be too radical and out of sync with economists' usual tactful handling of FX forecasts.

As long as inflation stays well-anchored, Brazil's central bank "appears likely to continue easing, further lowering the nominal carry in BRL from levels that are already historically low," Goldman Sachs (NYSE:GS) analysts wrote in a report last week.

Brazilian central bank president Roberto Campos Neto said last month a benign scenario for consumer prices meant there was scope for further policy accommodation following the bank's decision to cut rates to a record low in July.

In a sign of growing bearish sentiment on the real, Goldman slashed its expected three-month value to 4.05 per dollar from 3.70, also citing "Brazil's strong economic linkages to Argentina, which translate into significant spillover risk."

LITTLE UPSIDE FOR THE PESO

The loss of carry-trade value is becoming the main theme in Mexico as well, replacing concerns about the impact of the global trade war, which had been already discounted by currency strategists.

In August, Mexico's central bank, known as Banxico, cut its key lending rate for the first time since June 2014, fueling expectations further monetary policy easing could be on the way.

"We see little upside for MXN in the months to come as Banxico will very likely feel comfortable cutting rates on a potential decline of USDMXN, capping potential gains," Morgan Stanley (NYSE:MS) analysts wrote in a report last week.

The peso was forecast at 20.04 per dollar in one year in September's poll, 1.0% softer than its value on Wednesday and 1.9% weaker than in August's survey. Seven of 8 respondents to a separate question saw it skewed to the downside.

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Still, the Mexican unit continues trading within a range that took shape almost two years ago, offering predictability to decision makers and ordinary people alike against an increasingly complex background.

It is the opposite of Argentina, a country that sank into financial chaos after a presidential candidate disliked by investors won a key primary vote, crashing market expectations for a reelection of the incumbent government in October.

This led to a collapse of Argentina's assets, forcing officials to launch a debt reprofiling plan and restrictions to avoid further damage. But widespread mistrust prevails as Argentines run to the banks to withdraw their dollar deposits.

The latest steps by the government "have opened the door for stricter capital controls down the line, and increased the risks of a banking crisis, (and) loss of access to credit/capital markets," Andres Abadia, senior economist at Pantheon, said.