Economic Analysis - BMI Vs. Consensus: Above Consensus On LatAm FX - DEC 2017

We are above consensus on LatAm FX. Most of the region's currencies will benefit from strong interest rate differentials with the US, and rising prices for key commodity exports will support most countries' terms of trade. A broad shift towards prudent economic reforms will also help attract foreign investment and bolster the region's growth outlook. Although we expect most units to trade sideways through end-2017, over a multi-quarter time frame we forecast modest appreciation ( see ' Currency Roundup: Neutral Through End-2017 ' , October 6). The Brazilian real is an exception, due to a weakening real yield differential with the US and the potential for bearish sentiment ahead of the 2018 general election ( see 'BRL: Strength Has Run Its Course', September 28). We forecast the unit to average BRL3.41/USD in 2018, against consensus of BRL3.15/USD.

We are below consensus on LatAm inflation. We are broadly below consensus in our average inflation forecasts for Latin America for 2018, given lower than expected inflation in 2017 as well as generally stronger currencies in most of the region's major economies. Venezuela remains an exception, as our current forecast of 1,891.5% is well above consensus of 953.5%. Given the difficulties of forecasting in Venezuela, where little official data is available, our forecast is based on our projection of money supply growth, which has increased at a dramatic pace in recent months ( see 'Money Supply Growth To Keep Venezuela In Hyperinflation', August 14).

We are below consensus on US growth and interest rates. Our US real GDP forecast for 2018 of 2.1% is below consensus of 2.3%, as we believe the administration's most ambitious growth-supportive policies are unlikely to be achieved ( see ' Investment Set To Pick Up ' , September 29). Weaker than expected growth and subdued inflation will ultimately see the US Fed hike less aggressively than is currently expected, reflected in our end-2018 interest rate forecast of 1.50%, compared to consensus of 2.05%. Additionally, uncertainty over US monetary policy could rise in 2018, as the Board of Governors could feature several new faces, including a new chair ( see 'Fed Heading Towards An Uncertain 2018', September 12).

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