EMERGING MARKETS-Mexico yields see-saw ahead of cenbank minutes

Thu Jan 31, 2013 6:37pm EST

* Mexico minutes could reinforce views on rate cut
possibility
    * Peru, Costa Rica move to limit hot money flows

    By Michael O'Boyle
    MEXICO CITY, Jan 30 (Reuters) - Mexican yields were little
changed on Thursday ahead of the release of central bank minutes
that could either deepen or undermine bets that policymakers
could soon cut interest rates.
    Mexican bond yields recently hit record lows, and interest
rate swaps are pricing in a 25 basis point cut to the
country's benchmark rate of 4.50 percent by September.
 
    In a policy U-turn at its January meeting, the central bank
moved from warning of a potential rate hike to saying it could
cut borrowing costs if inflation keeps cooling. Minutes from the
meeting are due Friday at 0900 local time.
    The minutes "may show that there was no consensus, at least
one director will highlight that it is not yet the time to (cut)
and that we need these trends to consolidate," said Alberto
Ramos, an economist at Goldman Sachs in New York.
    One reason to cut might be to discourage flows of hot money
into the economy this year that could strengthen the peso
currency to the point where it makes exports less competitive
and crimps growth.
    The yield on Mexico's benchmark 10-year bond 
fell 1 basis point to 5.03 percent after bidding up earlier in
the session. The yield is trading just above record lows below 5
percent.
    The Mexican peso firmed 0.13 percent to 12.7105 per
dollar. The peso has shed 1.2 percent since the central bank
signaled it could cut rates. 
    Foreign investors have been piling into Mexican bonds; 
foreign holdings of peso debt jumped 60 percent last year and
are still rising. 
    "There is a element of preemptiveness to get ahead of the
curve, with the steady flows into bonds," Ramos said. "They do
not have an exchange rate problem yet, but they could have one
down the road."
     An easing in the euro zone's debt crisis and new economic
stimulus measures in Japan are seen fueling bumper investment
flows into Latin America and other emerging markets in 2013 and
policymakers are trying to ward off unwanted currency strength.
 
    Mexico has eschewed the types of direct intervention and
capital controls that other countries have used.
    Peru's sol currency finished bidding 0.31 percent
weaker at 2.575 per dollar on Thursday, a day after the central
bank tightened reserve requirements to soften the impact of
heavy capital inflows. 
    The sol is near a 16-year high and the central bank has
intervened in the currency market every day since late August to
buy dollars, but it did not step in on Thursday.
    Meanwhile, Costa Rica said it will limit lending to limit
the attractiveness of an interest rate gap that has sparked a
credit boom and drawn in potentially destabilizing foreign
capital. 
    The Brazilian real was little changed as the market eyed how
far policymakers would let the currency firm.
    The real hit a seven-month high on Tuesday, breaking past
the 2-per-dollar mark on bets the central bank will allow
further gains as policymakers fret about a recent move higher in
inflation.
    But its advance has stalled this week after Finance Minister
Guido Mantega warned that the government was ready to correct
any excessive moves in the exchange rate. 
    Brazil has used a series of measures to keep the real from
gaining too much in recent years. The real  closed
at 1.9885 per dollar, 0.05 percent weaker than Wednesday's
close. 
    
    Latin American FX prices at 21:15 GMT:
 Currencies                         daily %    YTD %
                                     change   change
                            Latest           
 Brazil real                1.9885    -0.05     2.59
                                             
 Mexico peso               12.7105     0.15     1.21
                                             
 Chile peso               471.1000     0.00     1.61
                                             
 Colombia peso           1775.2700     0.07    -0.52
                                             
 Peru sol                   2.5750    -0.31    -0.93
                                             
 Argentina peso             4.9775    -0.05    -1.31

 Argentina peso             7.8900    -1.14   -14.07
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