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EMERGING MARKETS-Brazil's real leads Latam FX higher on rate hike bets

·3 min read
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* Real gains about 1% * Peru presidential vote results awaited (Adds bullets, updates prices) By Susan Mathew and Ambar Warrick June 14 (Reuters) - Brazil's real led gains across Latin American currencies on Monday on expectations of a steep interest rate hike this week and data showing the region's biggest economy had surpassed pre-pandemic levels. The currency rose 1%, reversing some of Friday's steep 1.2% declines, after a central bank index showed Brazil's economic activity had risen above pre-pandemic levels in April. A survey by the central bank also showed forecasts for 2021 growth, inflation and interest rates hitting new highs. With inflation at 8%, well over the targeted 3.75%, the bank is expected to hike its key rate on Wednesday to 4.25%. "The central bank will see the better fiscal indicators and the currency appreciation offsetting the deterioration of current inflation, inflation expectations, and the faster closing of the output gap," Credit Suisse analysts told clients. Policymakers would continue to favor "partial normalization" of interest rates, they predicted. The real was among the worst performing emerging market currencies last year but is up over 2% so far in 2021. The other big story in Latin America is Peru, where vote counting for presidential elections is drawing to a close. Socialist Pedro Castillo holds a slight lead, though right-wing rival Keiko Fujimori is contesting several ballots. The sol is down about 7.5% since Castillo's surprise win in the first-round vote in April, as investors fretted over major changes to market-friendly laws. Mexico's peso erased early gains to fall 0.5%. Moody's said the country's macroeconomic policies would be little affected by the ruling party's loss of its congressional supermajority, following midterm elections last week. Emerging market currencies are generally benefiting from a calm dollar as well as reduced volatility, which is a green light for carry trades, particularly in the Mexican peso and South African rand. The Federal Reserve's policy decision this week is unlikely to show the U.S. central bank plans to start unwinding stimulus in the very near term. The dollar slipped after a strong rebound late last week, while MSCI index of emerging market currencies was on course for its worst session since April. Among stocks, Brazil's Bovespa index moved closer to all-time highs, with oil major Petrobras rallying after it said its Chinese partners in the Buzios pre-salt oil field would have to pay $2.94 billion for its prior investment there. Colombian markets were closed for a holiday. Key Latin American stock indexes and currencies: Latest Daily % change MSCI Emerging Markets 1381.76 -0.02 MSCI LatAm 2666.39 0.77 Brazil Bovespa 129894.21 0.35 Mexico IPC 51149.77 -0.27 Chile IPSA 4357.86 1.1 Argentina MerVal 66664.74 0.864 Currencies Latest Daily % change Brazil real 5.0678 1.02 Mexico peso 19.9687 -0.46 Chile peso 718.9 0.36 Peru sol 3.8907 -0.03 Argentina peso 95.2500 -0.12 (interbank) (Reporting by Susan Mathew and Ambar Warrick in Bengaluru; editing by Marguerita Choy and Jonathan Oatis)

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