BRASILIA: Brazil’s real is set to weaken over the next year on prospects of higher interest rates in the United States, but the increasingly likely victory of market-friendly presidential candidate Marina Silva in October could soften the currency’s drop, a Reuters poll showed.
Forecasts of 23 strategists in the poll continued to point to an 8-percent drop in the Brazilian currency over the next 12 months, about the same as in the previous survey last month, as higher interest rates increase the allure of US assets.
But many analysts are already revising their estimates to take into account the increasingly likely possibility of Silva defeating incumbent Dilma Rousseff. BNP Paribas cut its 12-month forecast to 2.33 from 2.50 per dollar previously, and Banco ABC Brasil slashed it to 2.30 from 2.50 one month ago. The real closed Tuesday at 2.24. Most investors at home and abroad dislike Rousseff’s frequent intervention in economic policy. Over the past few months, every Rousseff drop in opinion polls was followed by gains in stock and currency markets as investors raised bets on a less interventionist government next year.
“It is a struggle to come up with anything nice to say about the Brazilian economy,” noted Bill Adams, senior international economist at PNC Financial Services. “So what could possibly explain why the real is still on the stronger side of the 2.2-2.4 per US dollar range it has established since mid-2013? Politics.” BNP Paribas strategists Thiago Alday and Gabriel Gersztein cited another reason likely supporting the real over the next year: an improving current account. As economic growth tumbles into recession, imports drop, reducing the demand for dollars.
“The worst is behind us,” they wrote in a note, forecasting Brazil’s current account deficit to drop to 2 percent of gross domestic product at end-2015, from 3.4 percent in August.
The outlook for the Mexican peso was also slightly more optimistic from last month’s poll.
The Mexican currency is expected to trade at 12.75 per dollar in 12 months, up 3 percent from Tuesday’s close, on prospects of a heavy flow of foreign investments in oil production after a recently approved reform in the country’s energy sector. Analysts also cited the possibility of a stronger recovery in the US economy, Mexico’s main trading partner.
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