EMERGING MARKETS-Brazil real drops, rate futures up on weak fiscal data

Fri Nov 29, 2013 10:18am EST

RIO DE JANEIRO, Nov 29 (Reuters) - Brazil's real weakened on
Friday while interest-rate futures edged up after the country
posted a weaker-than-expected primary budget surplus for
October, fueling concerns about a deterioration in economic
fundamentals that could trigger a sovereign credit rating
downgrade next year.
    The real  dropped 0.6 percent, leading losses
among Latin American peer currencies, after the central bank
said Brazil posted its smallest primary budget surplus for the
month of October in more than a decade, casting doubt about the
government's ability to meet its year-end fiscal target.
 
    "The worse-than-expected fiscal data could hurt the
government credibility, fueling the discussion about a possible
downgrade of Brazil's ratings in the future, which could
translate into a weaker real," said a trader with a Brazilian
bank.
    Interest-rate futures rose as the fiscal numbers
added to fears that heightened government spending will make it
difficult for the central bank to reduce the pace of monetary
tightening.
    Yields paid on the interest-rate contract maturing in
January 2017 rose 7 basis points to 12.14 percent,
after dropping 12 basis points on Thursday on bets the central
bank would slow down the pace of interest-rate hikes next year.
    Also boosting Brazil's interest-rate futures were bets that
state-run oil company Petrobras would announce an
increase in domestic fuel prices later in the day.
 
    "The performance of the interest-rate market is related to
expectations of an increase in fuel prices," said Waldir Kiel, a
trader with H. Commcor brokerage. "Markets believe the price
increase would have an impact on inflation, forcing the central
bank to further raise the benchmark Selic rate."
    Other Latin American currencies posted more modest losses,
with the Mexican peso dropping 0.25 percent in thin
volumes due to a shortened U.S. trading session following the
Thanksgiving holiday.
    The Mexican currency had surged on Thursday on bets the
government will seek big reforms in the oil industry. Investors
believe President Enrique Pena Nieto is nearing a deal with the
main conservative party after the country's main left-wing party
pulled out of a pact that was forged to help pass economic
reforms.

 Latin American currencies at 1510 GMT:
    
 Currencies                         daily %    YTD %
                                     change   change
                            Latest           
 Brazil real                2.3295    -0.58   -12.43
                                             
 Mexico peso               13.1020    -0.25    -1.81
                                             
 Chile peso               529.9000    -0.32    -9.66
                                             
 Colombia peso           1931.5000    -0.20    -8.57
                                             
 Peru sol                   2.8020     0.00    -8.96
                                             
 Argentina peso             6.1350    -0.16   -19.93

 Argentina peso             9.5900     1.04   -29.30
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