By Gabriel Burin

BUENOS AIRE (Reuters). Brazil’s real will be supported by a surprising good fiscal performance in the Southern Hemisphere’s summer lull, as the campaign to elect a president for October begins to accelerate.

The fourth quarter saw it oscillate around 5.60 US dollars and this trend is likely to continue. Subdued market actions during the summer holiday season will help soften the blow of the greenback’s increase following recent hawkish Federal Reserve minutes.

The median estimation of 21 foreign currency strategists polled Jan. 5-5 shows that the real will rise 1.4% to $5.62 per dollar by March, from Thursday’s 5.70, as long as Brazil’s fiscal woes are under control.

The country’s public accounts swung to a small primary surplus in the 12 months through November, thanks to stronger-than-expected tax revenues and slower expenditures resulting from strict spending rules.

Investors worry that the improvements may not last long as President Jair Bolsonaro’s administration modified the fiscal framework to increase budget flexibility for social programs prior to the election.

Bolsonaro trails former President LuizInacio Lula Da Silva in the election polls. He has stated that he will seek out broad alliances to unify a country divided.

Padhraic Garciay, ING’s regional head for research in Americas, stated, “Having been on a good trajectory since 2016 as well into the pandemic it seems like Brazil could be moving in the wrong way.”

“This could be classified as a pre-election administration looking to find loopholes within the constitutional spending limit and degrading fiscal risk premia, forcing the central bank to increase its rate of interest.”

Brazil’s central banking system is the leader in tightening policy. The key interest rate was raised to 9.25% in 2020 from 2.0% in 2021. It is still holding an orthodox position this year in order to combat persistently high inflation.

Forecasts for the real were at 5.70 USD in twelve months. This is virtually the same as its Thursday value at 5.70. They also forecast a 3.7% decrease in the Mexican peso to 21.3507 dollars.

The weaker outlook for Mexico’s currency rests on perceptions its central bank’s rate hike cycle is still too moderate when measured up against other countries like Brazil, despite a larger than expected https://www.reuters.com/markets/us/mexican-central-bank-hikes-rates-more-than-expected-tame-inflation-2021-12-16 move last month.

(For more stories about the January Reuters foreign currency poll, click here

Reporting and polling done by Gabriel Burin, Buenos Aires. Additional polling conducted by Anant Chandak and Sarupya Ganguly in BENGALURU. Editing by Chizu Yama.