Mexico's peso is likely to bounce back from recent declines but by a smaller amount than previously expected, underscoring strategists' growing concerns about President Andrés Manuel López Obrador's management of the country's economy.
The peso will probably rise a little over 1 percent to 20.2 to the dollar in 12 months, according to the median forecast of 16 currency strategists and economists compiled by Reuters Nov. 29-Dec. 5, compared with 20.441 on Wednesday. This would suggest a rebound is due after the currency plummeted 8.8 percent since October to all-time lows in the worst performance in Latin American FX markets.
The recovery would, however, be much smaller than the 7 percent advance predicted in last month's poll, suggesting confidence in the peso's stability is wavering. All of the 10 forecasters who participated in both surveys revised their estimates to show a weaker currency.
J P.Morgan strategists said politics are likely to boost volatility across Latin America in 2019. But that is especially the case in Mexico, where Obrador "seems to be leaving his initial pragmatism aside," catching investors who during the campaign had bet he would keep a tight rein on public accounts and rub elbows with the business community.
Those perceptions, which drove "heavy" positions in Mexico that may now be unwound, took a blow after Obrador said he would cancel an a partially completed Mexico City airport project, arguing it was tainted by corruption and that the facility would be expensive to maintain.
The decision followed a public consultation and triggered a rout in Mexican markets. Investors feared Obrador could keep resorting to those strategies to justify raising government spending or going back on investment projects, particularly after saying he intended to change the constitution to facilitate legally binding referendums.
Mexico's central bank reacted to the currency selloff by increasing interest rates, a decision it called "indispensable" to counter confusion over future policies sparked by the incoming government. Most economists expect the bank, in tandem with other Latin American monetary authorities, to continue tightening policy next year, potentially cushioning the Mexican peso against further declines.
Reduced confidence in the Mexican currency is part of a larger swing in investors' moods over Latin America, with many moving to Brazil from Mexico following presidential elections in the region's top two economies.
A recent Reuters poll showed equity investors were increasingly resorting to a "buy Brazil, sell Mexico" strategy after far-right lawmaker Jair Bolsonaro, who has pledged to stamp down crime and corruption and plug a gaping budget deficit in a matter of years, won the Brazilian presidential vote.
Accordingly, the Brazilian real is expected to hold mostly flat, up 0.9 percent, at 3.825 to the dollar in 12 months, based on the median of 34 forecasts, a similar result to last month's poll.
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