EMERGING MARKETS-Brazil rate futures drop as central bank seen less hawkish

Thu Nov 28, 2013 9:53am EST

By Walter Brandimarte
    RIO DE JANEIRO, Nov 28 (Reuters) - Brazil's interest rate
futures dropped sharply on Thursday after the central bank
hinted at a less-aggressive monetary tightening cycle, while the
Brazilian real and the Mexican peso edged up in thin trading
during the U.S. Thanksgiving holiday.
    Brazil's interest-rate contracts maturing in January 2015
, one of the most traded, dropped 25 basis points after
the central bank changed the wording of a closely watched
statement issued Wednesday night after its monetary policy
    At the meeting, the bank decided to raise the benchmark
Selic rate by half a percentage point to 10 percent in order to
curb prices, but removed from the statement a previous reference
to monetary policy setting inflation on a declining trend for
next year. 
    Investors saw the change as a possible sign that the bank is
putting less emphasis on inflation as the economy struggles.
    "This statement must be read as a signal that a 25 basis
points hike in the following meeting must have gone up in
likelihood very meaningfully," Citi strategist Dirk Willer wrote
in a note to clients. "Of course, 50 basis points is still
possible, but it probably would need further negative inflation
surprises or significant currency weakness."
    Brazil's yield curve now prices in a 58 percent chance that
the bank will raise the Selic by only 25 basis points in its
next meeting in January, according to Reuters data. 
    Before the statement change, most investors bet the Selic
would go up by another 50 basis points in January.
    Clouding the outlook for inflation, which remains near the
ceiling of a government target, is uncertainty on whether
domestic fuel prices will be periodically adjusted according to
a formula that is being discussed by state-run oil company
Petrobras and the government.
    President Dilma Rousseff is reportedly resisting
implementation of such a formula for fears of its impact on
inflation, although analysts expect domestic fuel prices to be
raised soon, regardless of an agreement about future
    Another key variable for Brazil's inflation is that the
exchange rate remains weaker than 2.30 reais per dollar,
potentially increasing the price of imported goods.
    The Brazilian real  last traded at 2.3210 per
dollar, 0.2 percent stronger on the day, but analysts said it
remained vulnerable to signs that the U.S. Federal Reserve may
soon start winding down its stimulus measures.
    The Fed's bond-buying program currently injects $85 billion
a month into the U.S. economy, and some of that money often
finds its way into emerging markets as investors seek higher
    Trading in the Latin American foreign exchange markets was
thin, as foreign investors were mostly out of the market for the
U.S. Thanksgiving holiday.
    The Mexican peso gained 0.2 percent, recovering part
of Wednesday's losses, while the Chilean peso weakened
0.2 percent in its fourth consecutive session of losses.

 Latin American currencies at 1437 GMT:
 Currencies                       daily %    YTD %
                                   change   change
 Brazil real              2.3225     0.05   -12.16
 Mexico peso             13.0990     0.17    -1.79
 Chile peso             528.0000    -0.25    -9.34
 Peru sol                 2.8000     0.07    -8.89
 Argentina peso           6.1150    -0.08   -19.66

 Argentina peso           9.6000     1.25   -29.38