EMERGING MARKETS-Brazil real, Mexican peso gain on inflation surprise

Fri Feb 22, 2013 5:02pm EST

* 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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