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EMERGING MARKETS-Mexican peso sours on interest rate cut warning
January 18, 2013 / 11:31 PM / in 5 years

EMERGING MARKETS-Mexican peso sours on interest rate cut warning

* Latam currencies drop as Intel outlook weighs on global
    * Mexico peso loses 0.51 percent, Brazil real drops 0.17

    By Michael O'Boyle and Walter Brandimarte
    RIO DE JANEIRO, Jan 18 (Reuters) - Mexico's currency and
local rates fell on Friday after the central bank said it could
cut interest rates if inflation continues to cool and the
economy loses steam.
    The warning, issued after the bank's decision to keep
borrowing costs unchanged at 4.5 percent, reduced investors'
appetite for the Mexican peso, which fell 0.51 percent to
12.6600 per U.S. dollar, its biggest drop since Dec. 21
    "If the cut materializes, it will lower the 'carry'," said
Ezequiel Aguiree a strategist a Bank of America in New York,
referring to the so-called carry trade in which investors borrow
money in lower-yielding currencies such as the U.S. dollar or
the Japanese yen to buy assets denominated in higher-yielding
currencies such as the Mexican peso.
    Despite the weakening, Mexico's peso hit a 10-month
high this week and bets on further gains in the Mexican currency
on the Chicago exchange rose to a record high, with net-long
contracts worth 75.8 billion pesos ($5.98 billion) by the week
ending Jan. 15. 
    Many analysts consider it unlikely that the central bank
will take action soon to lower the interest rate, which has been
on hold since mid-2009.
    Other Latin American currencies also weakened after a
disappointing earnings outlook from chipmaker Intel 
overshadowed stronger-than-expected economic data from China.
    The Brazilian real  dropped 0.17 percent to
close at 2.0425 per U.S. dollar, nearing the upper limit of the
narrow range of 2.0-2.05 per dollar where it has been trading
since the end of 2012.
    Analysts bet, however, that the Brazilian central bank will
not allow the real to weaken much past 2.05 per dollar for fear
of inflation pass-through. 
    Those concerns increased after the bank's board said, in a
statement issued after their rate-setting meeting on Wednesday
night, that the inflation outlook worsened in the short term,
while economic activity continues to disappoint.
    The central bank's "post-decision communiqué acknowledges
the growing challenges faced by monetary authorities, which in
our view indicates that the central bank will keep its tight
grip on the exchange rate at least through the inflationary hump
expected in the first quarter of 2013," JPMorgan's analysts said
in a note to clients.
    Latin American FX prices at 2307 GMT:
 Currencies                         daily %    YTD %
                                     change   change
 Brazil real               2.0425     -0.17    -0.12
 Mexico peso               12.6600    -0.51     1.61
 Chile peso               471.5000     0.13     1.53
 Colombia peso           1769.3000    -0.22    -0.19
 Peru sol                   2.5510    -0.12     0.00
 Argentina peso             4.9500     0.00    -0.76

 Argentina peso             7.4600     0.67    -9.12

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