* Berlusconi takes lead in Italy senate race
* Brazil cenbank chief turns more hawkish, rates rally
* Brazil real, Mexico peso erase gains, drop modestly
By Walter Brandimarte
SAO PAULO, Feb 22 Latin American currencies
seesawed on Monday as investors reacted to conflicting reports
on the outcome of Italy's election, which is seen as critical to
country's economic path, while Brazilian rates rallied after
central bank president Alexandre Tombini reiterated concerns on
Currencies initially rose after predictions based on
telephone polls showed Italy's center left party, led by Pier
Luigi Bersani, taking a strong lead in both houses of
parliament, an outcome that would likely appease financial
markets worried about the continuity of economic reforms.
But currencies reversed course after results of an early
vote count showed that Silvio Berlusconi's center right
coalition was leading the key Senate race, a result that could
cause deep government instability if confirmed.
"A win by Bersani would leave markets more confident, while
the return of Berlusconi could trigger volatility," said
analysts with Banorte-Ixe in Mexico City.
The Mexican peso erased all its gains to trade 0.1
percent weaker in the afternoon, at 12.7225 per dollar. The
Chilean peso closed a modest 0.1 percent higher, while
the Brazilian real also erased early gains to fall
Brazilian local rates, known as DI rates, rallied, pricing
in bets that the base Selic rate could be raised next week,
after central bank president Alexandre Tombini said in a Sunday
interview with The Wall Street Journal that inflation has been
more resilient than policymakers would like it to be.
Tombini reiterated that the central bank sets monetary
policy based upon inflation, not economic growth targets, in
comments that sounded like an effort to allay market concerns
that the bank could tolerate higher inflation rates to help
foster economic growth in Brazil.
"Tombini has been extremely hawkish on the WSJ," said Aviad
Kotler, portfolio manager at PI Hedge Fund. "DI rates have been
very volatile lately, and it seems to us this may well be driven
by a lot of position adjustments aside from those expecting
actual (rate) hikes."
In a presentation to investors in New York on Monday,
Tombini was even more explicit as he said the central bank is
working to re-anchor inflation expectations toward the level of
4.5 percent - the center of a government target that stretches
from 2.5 percent to 6.5 percent.
While the Selic remains at an all-time low of 7.25 percent,
Brazil's 12-month inflation rates are dangerously near the
ceiling of that target.
Brazil's interest-rate futures, showed a majority of
investors were already betting the central bank would increase
the Selic rate by 25 basis points at the end of its monetary
policy meeting next week.
The DI contract maturing in January 2014, one of
the most traded, jumped 14 basis points to 7.81 percent.
Many analysts believe, however, that the central bank will
first change the language it used in the minutes of its previous
monetary policy meeting, when it promised to keep rates
unchanged for a "prolonged period," before actually hiking the
Latin American FX prices at 18:30 GMT
Currencies daily % YTD %
Brazil real 1.9731 -0.16 3.39
Mexico peso 12.7225 -0.10 1.11
Chile peso 472.9000 0.11 1.23
Colombia peso 1813.0000 -0.78 -2.59
Peru sol 2.5810 0.00 -1.16
Argentina peso 5.0325 -0.05 -2.38
Argentina peso 7.7600 0.52 -12.63