Brazilian real’s strength challenged as economy sours

(Reuters) – Strength in Brazil’s real currency will soon be challenged by rising worries about an ongoing downturn in Latin America’s No.1 economy and disagreements among policymakers, a Reuters poll of foreign exchange specialists showed.

The currency has been relatively stable close to 5.20 per U.S. dollar for months after a weak spell in the second quarter of 2022, defying concerns of market volatility around October’s presidential election.

Friday’s survey pointed to further appreciation for the real, gaining 1.9% in 1 year to 5.10 per U.S. dollar from 5.19 on Wednesday, according to the median estimate of 19 FX strategists polled over Feb. 28-March 2.

However, the analysts warned of a potential wobbly phase ahead with signs of economic deterioration after last year’s outburst of activity driven by former President Jair Bolsonaro’s inflationary spending drive.

“Growth concerns will not be going away any time soon and the risks of the Federal Reserve tightening more are elevated,” said Edward Moya, senior market analyst at OANDA. “The Brazilian real should see more downside in the first half of the year.”

Brazil’s economy contracted 0.2% in the fourth quarter of 2022, reeling from the lagged impact of a spike in consumer prices and steep interest rate hikes.

Emerging markets in general remain on tenterhooks, looking for any sign the U.S. central bank may prolong its hawkish stance as inflation remains stubbornly high.

Brazil’s policymakers, meanwhile, are profoundly divided, with the central bank employing a restrictive monetary strategy that is being assailed by President Luiz Inacio Lula da Silva and unorthodox officials in his government.

The poll also showed that Mexico’s peso is likely to stay on solid ground after rallying to its strongest levels in 5 years this week, almost breaking through 18.00 per U.S. dollar.

It was seen changing hands at 19.40 in one year, implying a 6.5% loss compared to Wednesday’s levels but still close to 20.00, which is considered a healthy level.

So far in 2023 the peso is up 7.4% and the real 1.7%.

Mexico’s currency is benefiting from a boom in foreign investment by global companies wanting to operate nearer to the United States in times of geopolitical tensions related to Russia’s invasion of Ukraine and business disputes with China.

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