EMERGING MARKETS-Brazil rates up on diesel prices, Latam FX weaker

Wed Mar 6, 2013 3:29pm EST

* Diesel price hike adds to Brazil inflation fears ahead of
Selic decision
    * Venezuela debt prices plunge on post-Chavez uncertainty
    * Brazil real, Mexico peso weaken before series of rate
decisions

    By Paula Arend Laier
    SAO PAULO, March 6 (Reuters) - Brazil's interest-rate
futures rose ahead of a key monetary policy decision later on
Wednesday as state-led oil firm Petrobras announced
an increase in diesel prices that added to inflation fears.
    The five-percent rise in wholesale diesel prices did not
change expectations for the Brazilian central bank to keep the
base Selic rate at a current all-time low of 7.25 percent this
evening, but increased the odds of a rate hike in subsequent
meetings. 
    Caution about other monetary policy decisions later this
week, including one by the European Central Bank on Thursday and
another one by Mexico on Friday, drove currency investors to the
perceived safety of the dollar, weighing on most Latin American
currencies.
    Mexico's peso led losses, declining 0.4 percent to
12.7510 per dollar, as some investors feared the central bank
could make good on its threat to cut interest rates, a move that
would likely reduce the appeal of Mexican assets.
    Some analysts forecast the Mexican peso is poised to
recover, however, as the central bank is more likely to cut
rates later in the year. 
    "Should the Bank of Mexico leave rates unchanged on Friday
as we expected, we could see a sharper push lower in the
dollar-peso exchange rate towards the 12.65/68 area, considering
the market is pricing in some probability of a cut," Flavia
Cattan-Naslausky, Latin America strategist with RBS, wrote in a
research note.
    In Brazil, the real  weakened 0.2 percent
following two consecutive winning sessions but remained within a
tight trading range of 1.95-2.0 per dollar. Analysts believe the
central bank will keep the real at those levels to avoid
additional inflation pressures at least for now, while the Selic
rate remains unchanged.
    A large majority of investors bet that Brazil's base
interest rate will remain where it is at the end of Wednesday's
monetary policy meeting, according to all of the 56 analysts
polled by Reuters, as well as the expectations priced in the
domestic yield curve. 
    For the April monetary policy meeting, however, the odds of
a 25 basis points hike in the Selic topped 60 percent after the
diesel price announcement, according to the same calculations.
    "In theory, that adds to inflation pressures," said Luis
Felipe Laudisio, a trader with Renascença brokerage in Sao
Paulo, referring to the government decision to allow Petrobras
to raise diesel prices for the second time this year. 
    "It might not change expectations for today's monetary
policy decision, but maybe for the next ones depending on how
inflation behaves," he added.
    Despite having a small direct impact on consumer inflation,
the hike could result in an indirect impact of as much as 0.16
percentage point this year on the IPCA, the benchmark price
index tracked by the central bank in its inflation-targeting
regime, according to Banco Bradesco's research department.
    Meanwhile, in Venezuela, government debt prices plunged as
investors feared a period of prolonged political uncertainty
following the death of President Hugo Chavez.
    Prices for Venezuela's global bonds due in 2027
, one of the most traded, declined nearly 2 points
in price, lifting their yields to 9.151 percent, their highest
in over a month.
    Venezuelan bonds had rallied in recent months as investors
were encouraged by prospects of a regime change in the
oil-exporting nation. But investors later adopted a more
cautious view in face of the country's growing economic
troubles.
    Chavez's death "comes at a time when there are already
mounting concerns about the outlook for the economy," David
Rees, emerging markets economist with Capital Economics, wrote
in a research note.
    "His preferred successor, Nicolas Maduro, will probably
maintain the current economic model in the near-term, but
increasing strains in the balance of payments suggest that
'Chavismo' may ultimately come to a messy end."
    
    Latin American FX prices at 1950 GMT:
 Currencies                           Daily  YTD pct
                                        pct   change
                            Latest   change  
 Brazil real                1.9684    -0.25     3.64
                                             
 Mexico peso               12.7510    -0.39     0.89
                                             
 Chile peso               472.8000    -0.02     1.25
                                             
 Colombia peso           1808.0000     0.09    -2.32
                                             
 Peru sol                   2.6080    -0.50    -2.19
                                             
 Argentina peso             5.0575     0.00    -2.87

 Argentina peso             7.8100     0.13   -13.19
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