EMERGING MARKETS-Brazil interest rate futures yields drop on weak retail sales

Tue Feb 19, 2013 10:44am EST

* Tombini suggests central bank may raise rates
    * Traders see slightly lower probability of rate hikes
    * Brazil real strengthens 0.32 pct, Mexico peso flat

    By Paula Laier and Silvio Cascione
    SAO PAULO, Feb 19 (Reuters) - Yields on Brazil's
interest-rate futures fell on Tuesday after a surprise drop in
retail sales in December suggested a smaller probability that
the central bank will raise its benchmark lending rate later
this year to fight inflation.
    Yields pared some losses after Central Bank President
Alexandre Tombini reiterated the bank is ready to "adjust"
monetary policy if needed. He added, however, that inflation is
not spiral ling out of control, reinforcing the view that the
bank is not about to take any action yet.
     Brazil's currency, meanwhile, strengthened towards the 1.95
per dollar level as traders continued to test the central bank's
willingness to intervene against further currency gains.
    Retail sales dropped 0.5 percent in December
from November, government data showed earlier in the day. While
the drop was partly caused by speeding inflation, which eroded
consumers' purchasing power, traders saw the numbers as evidence
of Brazil's sputtering economic growth, which could reduce the
central bank's room to raise interest rates.
    The central bank cut its benchmark Selic rate 
ten straight times through October 2012 to a record low of 7.25
percent. It has pledged to hold it there for a "prolonged"
period to help revive economic growth, which has disappointed in
the past two years. 
    "Evidence that demand is beginning to falter plays in favour
of the 'low for long' view, even if the inflation picture
remains uncomfortable," wrote HSBC economists Constantin Jancso
and Sabrina Andrade in a research note.
    Interest-rate contracts maturing in January 2014,
among the most traded, slipped about five basis points to bid at
7.68 percent. Despite the drop, the yield curve still prices in
an interest rate hike of about 100 basis points through the
year, according to traders.
     In a speech in Brasilia, Tombini said that the central
bank's current strategy remains valid. 
    "That doesn't mean, of course, that monetary cycles have
been abolished... When necessary, if prompted by the prospective
inflation outlook, the central bank's monetary policy stance
will be properly adjusted." 
    Brazil's currency, the real, strenghtened 0.32
percent to 1.9559 per dollar. Elsewhere in Latin America,
Mexico's peso traded nearly flat at 12.6976 per dollar, as
investors waited for the minutes of U.S. Federal Reserve's
latest meeting.
    Latin American FX prices at 1522 GMT:
 Currencies                                daily %      YTD %
                                            change     change
 Brazil real                     1.9559       0.32       4.30
 Mexico peso                    12.6976      -0.08       1.31
 Chile peso                    471.9000      -0.04       1.44
 Colombia peso                1795.4500      -0.46      -1.64
 Peru sol                        2.5810      -0.12      -1.16
 Argentina peso                  5.0200      -0.15      -2.14

 Argentina peso (parallel)       7.7300      -0.39     -12.29