South American currencies set to test new lows

South American currencies are set to test new lows in coming months as prospects of higher US interest rates, weak commodity prices and wrangling over Greece's future in the euro boost market volatility, a Reuters poll showed on Thursday. The region's five most traded currencies have lost between 5 and 15 percent since the beginning of the year, losing ground against the dollar at a faster rate than analysts had predicted.
Of those currencies, the Mexican peso is the only one expected to gain in 12 months' time as the country is expected to benefit from stronger economic growth in the United States. The currency, which touched a record low of 15.83 on Wednesday, is projected to trade at 15.20 per dollar in one year, compared with 15.02 seen in last month's poll. Its major South American currency peers however are expected to still be suffering in a year's time.
The Brazilian real, despite offering juicy returns with domestic interest rates climbing towards 14 percent a year, is seen weakening to 3.355 per dollar in 12 months, from 3.14 on Wednesday and 3.27 in last month's poll. Peru's sol and Colombia's peso are also expected to weaken, according to the poll, while the Chilean currency is forecast to hover around its current levels.
In 12 months time, Peru's currency is expected to trade at 3.31 per dollar; Colombia's, at 2,650 per dollar; and Chile's, at 631 per dollar. Previous forecasts from three months ago projected the currencies at 3.25, 2,635 and 637.5, respectively. Latin American economies have disappointed investors over the past few years, dragged down by the steep drop in commodity prices caused by slower Chinese growth. Iron ore, for example, lost has more than half of its value since early 2014, eroding Brazil's trade balance.
Slower economic growth has made the region less appealing to investors and consequently more vulnerable to global market volatility, which spiked this week to the highest since February as Greece moved closer to exiting the eurozone. Even more than Greece, the biggest foreign risk to Latin American currencies seems to be the expected increase in US interest rates, strategists said.
There could be renewed instability when the Fed raises its rates, said Marcelo Carvalho, head of Latin America economic research, BNP Paribas. "A lot of people in financial markets today have never seen the Federal Reserve raising rates," Carvalho said. Further currency depreciation pose high risks to corporate debt in Latin America, according to Fitch Ratings, which could prompt government intervention to curb sharp currency swings.
Of the five countries in the Reuters poll, corporate debt risks are highest in Mexico and Peru, the ratings agency said, where firms usually take debt in dollars and, in Peru's case, hedging is almost non-existent.