Reuters: US Dollar Report: EMERGING MARKETS-Latam FX seesaws with Italy's election results

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EMERGING MARKETS-Latam FX seesaws with Italy's election results Feb 25th 2013, 19:02 Mon Feb 25, 2013 2:02pm EST * 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 (Reuters) - 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 inflation. 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 0.2 percent. 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 Selic. Latin American FX prices at 18:30 GMT Currencies daily % YTD % change change Latest 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 Link this Share this Digg this Email Reprints

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