By Gabriel Burin
BUENOS AIRES (Reuters) - Latin American currencies are poised to edge up briefly against a weaker U.S. dollar with a potential Democrat sweep in the U.S. elections, but domestic challenges will continue holding them back after any initial bounce, a Reuters survey showed.
Former Vice President Joe Biden's lead over Republican U.S. President Donald Trump has widened in the final days of the 2020 campaign in three critical Rust Belt states that Trump narrowly won four years ago, according to Reuters/Ipsos opinion polls.
The Mexican peso
Still, Latin America's foreign exchange markets will have to grapple with more slow growth and budget challenges ahead, a tough legacy of the COVID-19 shock that has placed the four main Latin American economies in the top 10 ranking of total infections globally.
"The Mexican peso has been boosted by the increasing chance of a Biden victory in the past month, suggesting that it could rally a bit further if he wins the election," said Nikhil Sanghani, emerging markets economist at Capital Economics.
"And while another Trump victory would probably cause the Mexican peso to reverse some of its recent gains, we doubt that this outcome would have severe implications for the currency, particularly when compared to the 2016 vote."
On the downside, Mexico's recovery from the depths of the pandemic is losing steam, even with a big pickup in the third quarter that made up for much of the contraction in the previous three months.
This means any rise in the peso would be short-lived. Indeed, it is expected to drop to 21.4250 in one month and trend towards 21.55 in one year, according to the median estimate of 20 analysts polled Oct. 27-Nov. 2.
BIG DEFICIT, SOFT REAL
The Brazilian real is forecast to remain soft on account of a towering fiscal deficit that is getting more difficult to tame despite repeated vows by President Jair Bolsonaro's economic team to do so in 2021.
"In Brazil, foreign exchange moves are currently more related to fiscal worries," said Flavio Serrano, chief economist at Haitong Brasil. "I don't expect any big changes for the real due to the U.S. vote."
The currency is seen at 5.52 per U.S. dollar in one month and just at the 5.0 mark in one year, reflecting persistent doubts over its ability to return to more firm pre-pandemic trading levels.
The real depreciated to five-month lows last week as the government posted a primary budget deficit of 76.2 billion reais ($13.2 billion) in September caused by heavy emergency expenditures in the fight against the virus and depressed tax revenues.
Casting more shadows over the coming months, Brazil revised its 2020 debt and deficit forecasts to record highs due to the borrowing and spending needed to support individuals, businesses and local authorities during the health crisis.
The real is down 30% from the start of the year, compared with an 11% loss for the Mexican peso. While Bolsonaro has pledged to resume his austerity agenda next year, some investors expect he may not do so before the 2022 election in Brazil.
(Reporting and polling by Gabriel Burin in Buenos Aires; Additional polling by Manjul Paul; Editing by Ross Finley and Steve Orlofsky)