EMERGING MARKETS-Brazil rate yields rise, Chile peso dips

* Brazil central bank hints at rate rise

* Yields on Brazilian interest rate futures rise

* Chilean peso retreats from 2-1/2 year high, copper down

By Daniel Bases

NEW YORK, Dec 22 (BestGrowthStock) – Yields on Brazilian interest
rate futures rose on Wednesday after the central bank raised
its inflation expectations for this year and next in its latest
quarterly report.

Currencies across Latin America traded mixed, with Brazil’s
real tilting slightly stronger toward the significant 1.70 per
U.S. dollar level while Chile’s peso pulled back from Tuesday’s
2-1/2 year high.

A weaker than expected upward revision to third quarter
U.S. gross domestic product contributed to the subdued trading
activity already brought on by year-end holidays.
[ID:nN22291718]

Investors also focused on the tepid advance in U.S. stock
futures, which influence early trade in the region, as another
reason to proceed with caution.

“The (Brazil) inflation report was more hawkish and people
were starting to bring back the pricing in of a hike in January
as we have seen a big backup in front-end Brazilian yields,”
said Paul Biszko, senior strategist at RBC Capital Markets in
Toronto.

The yield on Brazil’s April 2011 (DIJJ1: )(0#DIJ:: ) interest
rate futures contract, among the most highly-traded of the
early session, rose to 11.11 percent from 11.04 percent.

In its quarterly inflation report the bank raised its 2010
inflation outlook to 5.9 percent from 5.0 percent and its 2011
forecast to 5.0 percent from 4.6 percent. [ID:nLDE6BL0WB]

Both those forecasts are well above the center of a
government inflation target, set this year and next at 4.5
percent plus or minus 2 percentage points.

Deviations of that magnitude from the center of the target
“suggest the need to implement in the short term an adjustment
in the benchmark interest rate” to contain growth imbalances
and reinforce inflation expectations, the central bank said.

The central bank has held its benchmark interest rate at
10.75 percent for three straight meetings, but analysts in a
weekly survey expect the so-called Selic rate to end 2011 at
12.25 percent.

In early U.S. trading, the S&P 500 was just 0.1 percent
higher and looking to extend four days of gains that drove the
index to levels reached just before Lehman Brothers went
bankrupt two years ago.

CURRENCIES

Brazil’s real rose 0.12 percent to 1.6980 (BRBY: ) per U.S.
dollar. However as it approaches the 1.70 area, gains slow
because of concern the central bank may step in to hold back
its advance. A stronger currency makes Brazil’s exports more
expensive on the global market.

Chile’s peso traded slightly weaker after the country’s top
export, copper, subsided from record highs. The peso (CLP=CL: )
weakened 0.3 percent to bid 470.20 to the U.S. dollar.

A Chilean central bank poll released on Wednesday showed
traders are divided on whether it will hold its benchmark
interest rate steady at 3.25 percent or raise it another 25
basis points for an eighth consecutive month in January.

Some analysts see the bank opting for another rate increase
in January to stay ahead of inflationary pressures in Chile’s
fast-growing economy. Others say the bank has room to pause its
monetary tightening cycle as the sharp appreciation of the
country’s peso contains inflation. [ID:nN22258513]

The Mexican peso (MXN=: ) weakened 0.05 percent to 12.3570
per dollar.

Yield spreads between emerging market bonds and U.S.
Treasuries, a key gauge of risk aversion, narrowed 3 basis
points to 247 basis points, according to the JPMorgan EMBI+
index (11EMJ: ).
(Additional reporting by Brad Haynes in Santiago, Editing by
Chizu Nomiyama)

EMERGING MARKETS-Brazil rate yields rise, Chile peso dips