EMERGING MARKETS-Brazil rates jump as central bank mulls policy

Wed Jan 16, 2013 2:48pm EST

* Markets speculate central bank toughens inflation stance
    * Latam currencies drop modestly for second day

    By Walter Brandimarte
    RIO DE JANEIRO, Jan 16 (Reuters) - Brazil's interest rate
futures jumped higher on Wednesday as some investors speculated
the central bank would voice concerns about inflation at the end
of its two-day monetary policy meeting later in the day.
    The interest-rate contract maturing in January 2014
, one of the most traded, climbed 5 basis ponts to 7.16
percent, its highest level in a week. 
    Brazil's inflation ended 2012 above the center of a
government target range and data showed prices continued to gain
traction early in 2013, complicating President Dilma Rousseff's
bid to keep the base Selic rate at all-time lows.
    Among the latest inflation data was an index calculated by
Fundacao Getulio Vargas think-tank showing prices rose 0.89
percent in the four-week period through Jan. 15. That compared
to an increase of 0.77 percent in the previous period.
    The central bank is widely expected to maintain the Selic
rate at its current level of 7.25 percent later on Wednesday as
it tries to bolster an anemic economy without adding to
inflation pressures. 
    Still, hopes that Brazil may soon unveil a somewhat stronger
growth pace at the end of 2012 increased after the IBC-Br
economic activity index for November came in above expectations.
 
    Silvio Campos Neto, an economist with Tendencias, a
consultancy in Sao Paulo, said the markets were taking advantage
of the picture depicted by inflation and economic activity
indicators "to speculate about a possible tone change in the
central bank's statement later on the day.
    "There is an expectation that the central bank could toughen
its stance against inflation," he said.
    Other analysts warned that the improvement in economic
activity does not seem to be sustainable and that the central
bank is more likely to keep the same language it used in
previous statements, stating that keeping rates stable for a
"prolonged period" remains the best strategy to bring inflation
back to the government target.
    
    CURRENCIES WEAKEN
    Latin American currencies weakened for a second consecutive
session as investors turned more cautious before key Chinese
economic data later in the week.
    The Brazilian real  ended 0.3 percent lower at
2.0435 per dollar, erasing its 2013 gains.
    Losses in the real were contained by expectations that the
central bank wants to keep the currency stronger than 2.05 per
dollar to avoid inflation pass-through.
    The Mexican peso traded down 0.1 percent, after
sliding as much as 0.6 percent earlier as foreign investors
continued to bet on a stronger currency.
    Latin American FX prices at 1928 GMT:
    
 Currencies                         daily %    YTD %
                                     change   change
                            Latest           
 Brazil real                2.0435    -0.39    -0.17
                                             
 Mexico peso               12.6263    -0.14     1.88
                                             
 Chile peso               474.8000     0.02     0.82
                                             
 Colombia peso           1774.4000    -0.25    -0.47
                                             
 Peru sol                   2.5470    -0.24     0.16
                                             
 Argentina peso             4.9475     0.05    -0.71

 Argentina peso             7.4700    -1.47    -9.24
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