Currency Forecast - Currency Roundup: Neutral Through End-2017 - DEC 2017


We are neutral on Latin American currencies over the coming months. In line with our view, the region's units have largely traded sideways over the last quarter as rallies in H117 ran out of steam ( see 'Currency Roundup: Little Upside Left This Year', July 17). While strong real interest rate differentials with the US will support most units moving forward, we see little scope for additional upside this year due to limited price gains for key commodity exports and significant policy uncertainty ahead of a slate of upcoming elections.

Over the long term, we remain positive on the region's currencies. We expect most to perform well in relative value terms, and we see room for modest nominal appreciation in 2018. Rising prices for key commodity exports will support most countries' terms of trade, while falling inflation will support real yields. Additionally, we expect most countries to continue a shift toward prudent economic reforms that will help attract foreign investment and bolster the region's growth outlook, supporting currencies. That said, downside risks to our view are substantial, as the upcoming elections could threaten to stall or undo economic reforms.

Bulk Of Gains Already Realised
Americas - LCY/USD Exchange Rate Performance, %
Source: Bloomberg, BMI

M exico (M XN ): We see little scope for further spot appreciation of the Mexican peso this year. The unit has largely traded sideways in recent months, in line with our view, as a sentiment reversal has played out. High risk-adjusted bond yields will support the unit, underpinning our view that it will continue to see gains in total return terms. The peso remains one of our favourite EM currencies in relative value terms, and we are broadly constructive on the MXN over the long term. We forecast modest spot appreciation over the next two years and further gains in total return terms.

Rounding Lower As Rally Ends
Mexico - Exchange Rate, MXN/USD
Source: Bloomberg, BMI

Brazil (BRL): The Brazilian real is an outlier in the unit. Like the rest of the region's currencies, we expect it will likely trade sideways over the coming months, but we forecast depreciation over the coming year. A weakening real yield differential with the US and the potential for bearish sentiment ahead of the 2018 general election will put downside pressure on the unit. Volatile shifts in sentiment in reaction to political developments are likely to drive currency movement over the coming quarters, as the public's deep dissatisfaction with the political elite will create opportunities for outsider candidates with populist agendas to mount competitive campaigns. Nonetheless, real bond yields will remain elevated relative to the US, which should ensure that the currency outperforms in total return terms.

Election Uncertainty Poses Downside
Brazil - Exchange Rate, BRL/USD
Source: Bloomberg, BMI

Chile (CLP): We have a neutral outlook on the Chilean peso in the short term, following a substantial rally over recent weeks. Our Metals team expects only modest increases in copper prices over the remainder of the year, which will limit upside to Chile's terms of trade. Additionally, the country's real interest rate differential with the US is likely to narrow, as we expect an additional interest rate cut before end-2017. Moving forward, we expect modest appreciation in line with a gradual increase in copper prices and a rebound in economic activity growth, which will support investment inflows.

Rally Has Run Its Course
Chile - Exchange Rate, CLP/USD
Source: Bloomberg, BMI

Colombia (COP): The Colombian peso is likely to trade in a relatively tight band over the coming months. Although higher oil prices will offer support to the country's terms of trade, a narrowing real interest rate differential with the US will place downward pressure on the unit. At the same time, investor sentiment will likely remain relatively cautious in the lead up to parliamentary elections in March 2018. Over a longer time horizon, we expect the peso to appreciate modestly against the US dollar as oil prices rise and growth picks up.

Uncertainy Will Limit Potential Gains From Oil Prices
Colombia - Exchange Rate, COP/USD
Source: Bloomberg, BMI

Peru (PEN): The nuevo sol will continue to trade sideways over the short term. Despite higher copper prices, the central bank has used US dollar purchases to keep the exchange rate stable and mitigate appreciation, which we expect will continue. In 2018, the bank will likely pare back its interventions, which will allow the unit to strengthen in line with higher average copper prices.

Interventions Limiting Movement
Peru - Exchange Rate, PEN/USD
Source: Bloomberg, BMI

Argentina (ARS): We are broadly neutral on the Argentine peso over the short term, although some spot depreciation is likely. Markets have likely already priced in the expected gains from October's legislative election, and elevated inflation continues to weaken the unit's purchasing power. Over the long term we remain positive on the unit, particularly on a total return basis. Robust economic activity growth, rapidly decelerating inflation and attractive real interest rates will support strong capital inflows that will buoy the unit. That said, a relatively wide inflation differential with the US will persist over the coming years and keep downside pressure on the unit's spot rate.

Some Spot Depreciation Likely
Argentina - Exchange Rate, ARS/USD
Source: Bloomberg, BMI
Americas - Regional Currency Performance
Americas Unit Current Price 3 Month (% Chg) 1 Year (% Chg) 2016 (ave) YTD (ave) 2017f (ave) 2018f (ave)
f = BMI forecast. YTD = Jan 1 - September 29. Source: Bloomberg, BMI
Argentina ARS 17.36 -4.9 -11.5 14.78 16.25 16.52 16.73
Brazil BRL 3.16 4.5 3.2 3.48 3.17 3.18 3.30
Canada CAD 1.25 4.2 5.1 1.33 1.31 1.29 1.23
Chile CLP 639.2 4.1 2.9 676.2 654.1 650.0 635.0
Colombia COP 2,936 3.8 -1.5 3,052 2,941 2,950 2,876
Mexico MXN 18.17 -0.5 7.0 18.69 18.89 18.75 18.60
Peru PEN 3.27 -0.7 3.9 3.37 3.27 3.26 3.23