Top Forecaster Sees Brazil Currency Uproar Tamed by Temer Legacy

(Bloomberg) -- Never mind the chaos. Brazil's real may end the year where it began.

The headwinds for the currency are obvious - it posted the fattest return among global currencies last year, and then reform-minded President Michel Temer landed in a political scandal last month that could result in his ouster.

Regardless, investor appetite for Brazil's high interest rates and optimism that Temer's agenda would outlast him provide support amid the turmoil, said Gustavo Rangel, the chief Latin America economist for ING Financial Markets LLC and the region's top currency forecaster according to Bloomberg rankings.

The real posted the worst slump in 18 years on May 18, the day after a local newspaper reported that President Michel Temer was recorded apparently endorsing the payment of hush money to the jailed former lower house speaker. It has since recovered half of the decline, and almost erased year-to-date losses.

"The current level, from 3.25 to 3.35 per dollar, is sustainable even in an environment of high uncertainty," Rangel said in an interview. His base case scenario assumes some progress on social security reform and continued external risk appetite. He estimates the real ending the year between 3.25 and 3.35 per dollar, compared to the 3.25 on Dec. 30.

Even if watered down, the approval of any part of the pension reform -- such as the minimum retirement age -- would be enough to give investors and credit rating companies confidence that the trajectory of fiscal accounts will improve, he said.

Before the most recent political brouhaha, Rangel had a bullish view for the real. He expected it to reach 2.80 after pension reform approval, something he said many foreign investors were waiting on to put their chips in Brazil. With these investors on hold, and not overweight, the selloff was not broader and the currency has been able to rebound, he said.

"The external scenario is much better and inflation improved a lot, so the economic fundamentals are more supportive for the real now than last year," he said. "And also, the carry continues to be attractive."

Not everyone expects the external scenario to be supportive for the real.

"The dollar will be well bid in the next two quarters" on the back of better U.S. economic data and a fairly hawkish Federal Reserve, said Marcin Lipka, a currency analyst at Cinkciarz.pl in Warsaw who sees the currency weakening to 3.55 per dollar by the end the year. He was one of the top forecasters for Latin American currencies at the end of 2016.

"It is more about the dollar regaining the value than the real losing it," he wrote.

Rangel doesn't see the real plunging to the above-four level seen in early 2016, before former President Dilma Rousseff's impeachment. At most, he said, if politics continue to sour, it could overshoot to 3.50.

To contact the reporter on this story: Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net.

To contact the editors responsible for this story: Rita Nazareth at rnazareth@bloomberg.net, Christiana Sciaudone, Peter Millard