EMERGING MARKETS – Latin American currencies on longest winning streak in two years
* Latam shares, FX up for 8th straight day
* Brazil inflation accelerates past forecast
* IMF approves Argentina’s $45 billion program – sources
* Emerging market debt sees 11 consecutive weekly outflows – BofA (updates with market close)
By Anisha Sircar
March 25 (Reuters) – Latin American currencies rallied for the eighth straight day on Friday as investors supported commodity-related assets as the Brazilian real hovered at a two-year high as soaring inflation fueled expectations of an aggressive tightening of monetary policy.
The MSCI Latin American Currency Index rose 1.2%, while stocks gained 0.8%. Both indexes were expected to end the week up, with the former on track for its best week since June 2020.
Brazil’s real gains jumped 1.7% to 4.74 to the dollar, after monthly inflation data ending in mid-March showed the biggest rise in seven years.
“The stronger than expected Brazilian inflation reading for the first half of March of 10.8%y/y will be followed by a jump to 11.5-12.0% in the near term as recent fuel price hikes are trickling down,” said William Jackson, chief emerging markets economist at Capital Economics.
“While the central bank has given signals that there may be only one more 100 basis point rate hike in the current cycle, the coming rise in inflation will prompt it to tighten up a bit more.”
Brazil’s central bank chief Roberto Campos Neto said ongoing monetary tightening is likely to end with benchmark rates at 12.75%. Swiss bank Credit Suisse expects the benchmark Selic interest rate to end the year at 14%.
Latin American currencies are on course for their longest winning streak since May 2020 as commodity prices soared on supply issues following sanctions on Russia for its attack on the Ukraine which started on February 24.
Crude prices rose more than 1% to over $120 a barrel on Friday after a missile attack on an oil distribution facility in Saudi Arabia.
However, some analysts are skeptical of further gains for currencies in the region due to potential political uncertainties ahead of Brazil’s general election this year and an aggressive tightening cycle by the US Federal Reserve.
“We expect the Brazilian real to decline from ~4.8/$ currently to 5.3/$ by the end of 2022, and the Mexican peso to decline from ~20/$ to 21/$,” said James Reilly, economist at Capital Economics. a rating.
The Mexican peso continued to hold near its highest level since late September at 20 to the dollar after the central bank on Thursday raised its benchmark interest rate by 50 basis points to 6.5%, a decision announced unexpectedly a few hours earlier than expected by President Andres Manuel Lopez Obrador.
Meanwhile, sources told Reuters that the board of directors of the International Monetary Fund had approved a $45 billion program for Argentina after more than a year of negotiations, allowing the South American country to avoid a costly default with the Washington-based lender.
Emerging market debt has seen outflows over the past 11 weeks, while emerging market equities have seen outflows over the past two weeks, Bank of America said in its weekly flow note on Friday.
(Reporting by Anisha Sircar and Sruthi Shankar in Bengaluru; Editing by Jonathan Oatis and Richard Chang)