EMERGING MARKETS-Mexico peso up on economy prospects, real weakens

Mon Mar 11, 2013 6:48pm GMT

* Investors grow optimistic on Mexican economy
    * Brazil c.bank intervenes to curb FX gains
    * Mexico peso gains 0.8 pct, Brazil real drops 0.5 pct

    By Walter Brandimarte
    RIO DE JANEIRO, March 11 (Reuters) - The Mexican peso
extended its rally on Monday on optimism about the country's
economic prospects following an unexpected rate cut last week,
while the Brazilian real weakened as the central bank intervened
to curb recent currency gains.
    The peso rose 0.8 percent to 12.5270 per dollar as
investors bet a one-off cut in Mexico's base interest rate,
rather than reducing the appeal of domestic assets, would
further boost an economy that is also benefiting from hopes of
market-friendly reforms.
    The peso has strengthened 2.8 percent so far this year, and
more than half of those gains came after policymakers cut
borrowing costs to 4.0 percent from 4.5 percent on Friday.
 
    "Regardless of the rate cut we remain positive in the still
undervalued Mexican peso, which we continue to forecast as set
to appreciate to 11.75 per U.S. dollar by the end of 2013,"
Alberto Bernal, head of research at Miami-based BullTick Capital
Markets, wrote in a research note.
    On the opposite direction, the Brazilian real  
weakened 0.6 percent to 1.9560 per dollar after the central bank
acted to stop the currency from further appreciating past the
level of 1.95 per dollar - considered by many analysts as a
boundary of an informal trading band imposed by policymakers.
    The real had pierced the 1.95-per-dollar level for the first
time in 10 months on Friday, after higher-than-expected
inflation data increased bets that the central bank would soon
raise interest rates, adding to the appeal of real-denominated
assets.
    Since then, investors had been trading with extreme caution,
on the lookout for a possible government intervention. It
finally came on Monday morning when the central bank called an
auction to sell reverse currency swaps, derivative contracts
that emulate the purchase of dollars in the futures market.
    "That intervention was expected. It doesn't mean the central
bank wants to weaken the real. It only wants to smooth out its
gains," said Caio Sasaki, an analyst with XP Investimentos in
Rio de Janeiro.
    Sasaki believes the real may still appreciate past 1.95 per
dollar, as long as those gains are not too sharp, as the
government will likely favor a slightly stronger currency to
fight inflation.
    The Brazilian real has gained over 4 percent so far this
year on bets the central bank would use the currency as a tool
to cheapen the cost of imported goods and help anchor inflation
expectations.
    Brazil's consumer inflation reached 6.31 percent in the
12-month period through February, nearing the ceiling of a
government target of 6.5 percent. 
    
    Latin American FX prices at 1830 GMT:    
 Currencies                         daily %    YTD %
                                     change   change
                            Latest           
 Brazil real                1.9560    -0.54     4.29
                                             
 Mexico peso               12.5270     0.82     2.69
                                             
 Chile peso               471.5000    -0.02     1.53
                                             
 Colombia peso           1802.4400    -0.01    -2.02
                                             
 Peru sol                   2.5950     0.04    -1.70
                                             
 Argentina peso             5.0725    -0.10    -3.15

 Argentina peso             7.8000     0.38   -13.08
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