A tale of two votes: elections drive volatile 2018 LatAm FX outlook

As Latin America braces for potentially game-changing presidential elections this year, a Reuters poll of currency strategists and economists revealed diverging outlooks for the region's two main currencies. The Mexican peso is forecast to weaken in the first half, as traders hedge against a potential populist victory, before soaring by year-end as it becomes clearer that even a populist president will struggle to pass radical measures in Congress.
In contrast, the Brazilian real will probably slip steadily throughout the year, though uncertainty over exactly how much reached a six-month high. Regional drivers are likely to matter most in 2018, forecasters said, even as global central banks tighten policy and geopolitical risks simmer. The peso is set to weaken 2 percent in six months to 19.75 per dollar, according to the median of 18 forecasts taken January 3-4. It is then forecast to surge 4 percent to 18.6 by year-end.
That is a more pronounced move than the one forecast in the December poll, which showed the peso weakening 2.3 percent in six months before turning flat in a year. The boomerang motion suggests concerns over a substantial economic hit stemming from trade negotiations between Mexico, the United States and Canada, which drove the peso to all-time lows in 2017, are unlikely to materialize.
Grupo Banorte expects talks to culminate in a favorable agreement but acknowledged that "tensions between the negotiating teams will increase further before they wane." In past elections, the Mexican currency weakened as much as two standard deviations three months before the vote, Padilla said. That would entail a depreciation of around 1.4 peso, according to Reuters calculations, or more than 7 percent over the current rate.
The Brazilian real is seen weakening 2.3 percent in six months and 3.4 percent by year-end, according to the median of 40 estimates, compared to previous forecasts of 2 percent and 2.6 percent. But the standard deviation for 12-month estimates, a measure of dispersion, reached the highest level since the July poll, after a corruption scandal had all but derailed Temer's pension reform plan.