EMERGING MARKETS-Brazil real, Mexican peso gain on inflation surprise
* Mid-Feb inflation top forecasts in Brazil, Mexico * Data fuels bets Brazil cenbank to raise key interest rate * In Mexico, data trims odds of interest rate cut * Brazil real up 0.1 pct, Mexican peso jumps 0.4 pct By Natalia Cacioli and Paula Arend Laier SAO PAULO, Feb 22 (Reuters) - The currencies of Brazil and Mexico gained on Friday after data showed mid-February inflation came in higher than expected in both countries. The data fueled bets Brazil's central bank will tighten monetary policy soon. Investors saw Mexico becoming more cautious about inflation when deciding on a possible interest rate cut in the next few months. The Mexican peso led gains in the region, up 0.4 percent to 12.705, after data showed annual inflation picked up to 3.47 percent in the first half of February, above expectations for a rise to 3.4 percent. "While the (Mexican) central bank's reasons for the rate cut case are clear ... today's release decreases the odds of this event, in our view, as the board will likely remain vigilant about further developments on the inflation front," Barclays' analysts Bruno Rovai and Marco Oviedo wrote in a research note. Other analysts, however, still held on to expectations of a rate cut, which could reduce the allure of the Mexican peso to foreign investors. "Although the data was above expectations, I don't think it is big enough to significantly change the expectations for a (rate) cut. The problem is more in the timing and the market is debating that," said Juan Carlos Alderete, currency strategist with Banorte-IXE group. In Brazil, the real gained as much as 0.4 percent, recovering from two consecutive sessions of losses, after a report showed a government-sponsored cut in electricity rates slowed the country's inflation only slightly. The real pared gains in the afternoon to close only 0.1 percent stronger, however, as dollar outflows picked up in the afternoon, traders said. "The IPCA-15 came in above expectations, increasing bets that the exchange rate will be used along with interest rates to fight inflation," said Luciano Rostagno, chief strategist with WestLB bank in Brazil. Brazil's IPCA-15 inflation index, considered a preview of the country's official IPCA index, climbed 0.68 percent in the month to mid-February, less than the 0.88 percent rise in the previous period, but above economists' forecast for a 0.61 percent increase. Domestic interest rate futures rallied, with the contract for January 2014 up 16 basis points to 7.83 percent, as investors bet the central bank could raise the benchmark Selic rate as early as March to fight inflation. Brazil's domestic yield curve priced in a slightly larger than 50 percent chance of a Selic hike in March, said Vitor Carvalho, senior trader with Ativa brokerage in Sao Paulo. By May, the odds of a half-percentage-point increase in the Selic reached 100 percent. Brazil's central bank has said it would maintain the Selic at an all-time low of 7.25 percent for a "prolonged period," but consistently higher-than-expected inflation prints have fueled speculation the bank may change that language soon. Latin American FX prices at 2125 GMT: Currencies daily % YTD % change change Latest Brazil real 1.9700 0.10 3.43 Mexico peso 12.7050 0.39 1.25 Chile peso 473.4000 -0.04 1.12 Colombia peso 1798.9000 0.01 -1.83 Peru sol 2.5810 0.04 -1.16 Argentina peso 5.0275 0.05 -2.29 Argentina peso 7.7800 0.64 -12.85
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