EMERGING MARKETS-Brazil rate futures up as cbank signals tight policy

Thu Mar 7, 2013 9:11am EST

* Latin American currencies little changed on ECB caution
    * Brazil central bank signals Selic may rise soon
    * Brazil January industrial output higher than forecast
    * Brazil real gains 0.1 pct, Mexican peso unchanged

    By Walter Brandimarte
    RIO DE JANEIRO, March 7 (Reuters) - Brazil's interest-rate
futures rose on Thursday after the central bank signaled it was
ready to fight inflation with tighter monetary policy, while
most Latin American currencies were little changed as investors
digested comments from European Central Bank President Mario
Draghi.
    Shorter-dated interest rates in Brazil rallied as investors
bet the bank could raise the base Selic rate as early as April.
Longer-dated rates rose more modestly, causing the domestic
yield curve to flatten, as fears that inflation could get out of
control in the future lessened. 
    Brazilian policymakers kept the Selic rate at an all-time
low of 7.25 percent on Wednesday night, but made meaningful
changes in the short statement released with the decision. 
    The board of central bank directors removed a pledge to keep
rates unchanged for a "prolonged period" and said it "will
monitor the evolution of the macroeconomic scenario until its
next meeting, when it will define the next steps in its monetary
policy strategy." 
    "Given the meaningful change in language, and the fact that
such change was followed by a hike in the past two hiking
cycles, the curve should move to price-in the possibility of a
hike in April," Ken Lam, a strategist with Citi, wrote in a note
to clients.
    Interest-rate contracts maturing in Jan 2014 jumped
9 basis points to 7.76 percent, while those expiring in Jan 2017
 gained only 1 basis point to 8.99 percent.
    Higher-than-forecast industrial production for January
supported the view that Brazil's economy is gradually
recovering, adding to bets on a higher Selic.   
    While the expectation of higher interest rates could attract
more dollars into Brazil, the real  gained a modest
0.1 percent to 1.9664 per dollar as investors feared the central
bank could intervene to curb any sharp moves in the exchange
rate.
    Latin American currency markets were also on the sidelines
as ECB chief Mario Draghi spoke to the European Parliament.
Investors were on the lookout for signs that the ECB could ease
monetary policy, which could boost the dollar against the euro.
 
    In Mexico, speculation that the central bank could lower
interest rates at the end of its monetary policy decision on
Friday weighed on the peso, which remained flat at
12.7775 per greenback.
    
    Latin American FX prices at 1347 GMT:    
 Currencies                         daily %    YTD %
                                     change   change
                            Latest           
 Brazil real                1.9664     0.10     3.74
                                             
 Mexico peso               12.7775     0.02     0.68
                                             
 Chile peso               472.0000     0.17     1.42
                                             
 Colombia peso           1803.0100     0.28    -2.05
                                             
 Peru sol                   2.6080    -0.50    -2.19
                                             
 Argentina peso             5.0600     0.00    -2.92

 Argentina peso             7.8100     0.13   -13.19
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