Economic Analysis - Currency Roundup: Little Upside Left This Year - 24 JULY 2017

We are moderately bearish on Latin American currencies over the coming months, as major commodities face further price weakness and sentiment-driven rallies lose steam. Most units have broken through key technical lines in recent weeks, which will likely see the establishment of new trading ranges for H217. While we still hold a broadly bullish outlook over the longer term due to improving fundamentals, we see little room for significant gains this year, particularly for the Mexican peso and Brazilian real given lingering policy uncertainty. However, we note potential upside to our forecasts for the currencies of the region's major copper producers, Chile and Peru, should copper's current rally continue over the remainder of the year.

Over the long term, we maintain a broadly positive outlook for Latin America currencies. Rising prices for key commodity exports will support most countries' terms of trade, while falling inflation will support real yields. Additionally, prudent economic reforms will help attract foreign investment, supporting currencies. However, we note substantial political risks to this view, as upcoming elections in 2018 could result in major policy shifts.

Brazil: We are broadly neutral on the Brazilian real over the coming months, after rebound in bearish sentiment supported a rally over recent weeks. From a spot rate of BRL3.18/USD, we see the unit at BRL3.19/USD at end-2017. Over the longer term, spot depreciation is likely given that Brazil's higher inflation outlook relative to the US is not matched by higher real GDP growth due to weak reform prospects. Given Brazil's significantly high real interest rates, the long-term trend of total return outperformance versus the US dollar seems likely to continue ( see ' BRL: Short-Term Strength Will Fade In 2018 ' , July 6).

Sentiment Reversal Fuels Mexico Outperformance
Americas - LCY/USD Exchange Rate Performance, %
Source: Bloomberg, BMI

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