EMERGING MARKETS-Brazil rate futures fall on GDP, Latam currencies dip

Tue Dec 3, 2013 11:21am EST

By Walter Brandimarte
    RIO DE JANEIRO, Dec 3 (Reuters) - Brazil's interest rate
futures dropped on Tuesday following weaker-than-expected
economic growth data for the third quarter, while concern about
the withdrawal of U.S. monetary stimulus weighed on the
performance of Latin American currencies.
    Investors in Brazil's interest-rate futures market increased
bets that the central bank may slow down the pace of monetary
tightening after data showed the economy shrank in the third
quarter for the first time since early 2009. 
    Although a quarter-on-quarter contraction was expected, it
was sharper than forecast by economists, casting doubt about the
central bank's ability to keep raising interest rates in the
run-up to 2014 elections, when President Dilma Rousseff is
widely expected to seek a second term. 
    "The GDP falling shows (Rousseff) is less likely to raise
interest rates," said Paulo Petrassi, an economist with Leme
Investimentos in Florianopolis, Brazil. "Inflation is already
high unfortunately. We will see a central bank that is limited
in its efforts to bring inflation to the center of the target."
     Although Brazil's central bank has enjoyed informal
operational autonomy to set interest rates, President Dilma
Rousseff's administration is believed by analysts to provide
input on major monetary policy decisions.
    Interest rate contracts maturing in January 2005,
one of the most traded, dropped 10 basis points to 10.65
percent. 
    The country's yield curve still priced in a 60
percent probability that the central bank will raise its
benchmark Selic rate by half a percentage point in January, to
10.5 percent, according to Reuters data. However,
bets on a 25-basis-point hike in the Selic have increased to 40
percent from about 30 percent late on Monday.
    
    CURRENCIES WEAKEN
    Latin American currencies were flat to lower as recent U.S.
economic data spurred fears that the U.S. Federal Reserve may
start winding down its bond-buying program earlier than many
expect.
    The Fed's bond-buying program injects $85 billion a month
into the U.S. economy and part of that money often flows into
emerging market economies as investors seek higher returns.
    The Brazilian real  slid 0.1 percent in its
third consecutive session of losses. 
    The Mexican peso was steady at 13.221 per dollar,
however, as hope that the government will pass key economic
reforms supported appetite for Mexican assets.
    "The political tectonic plates are shifting in Mexico, but
we remain confident that the political and energy reforms are
still likely to go ahead - and will probably still exceed
initial expectations," strategists with Brown Brothers Harriman
wrote in a research note.
    They recommended investors to "slowly accumulate" short
positions in the U.S. dollar versus the Mexican peso while the
currency trades in the 13.30-13.40 area, although they
acknowledged near-term risks stemming from the Fed's stimulus
tapering.

    Latin American currencies at 1550 GMT:
    
 Currencies                          daily %    YTD %
                                      change   change
                             Latest           
 Brazil real                 2.3560    -0.11   -13.41
                                              
 Mexico peso                13.2210    -0.04    -2.70
                                              
 Chile peso                533.5000    -0.19   -10.27
                                              
 Colombia peso            1940.2000    -0.35    -8.98
                                              
 Peru sol                    2.8040    -0.04    -9.02
                                              
 Argentina peso              6.1725    -0.24   -20.41

 Argentina peso              9.2800    -0.65   -26.94
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