EMERGING MARKETS-Brazil real, Mexico peso mark 2008 highs

* Brazil resigned to more currency gains – for now

* U.S. jobs data supports bids for region’s currencies

* Brazil real firms 1.16 pct, Mexico peso up 0.41 pct

By Michael O’Boyle and Jean Luis Arce

MEXICO CITY, April 1 (Reuters) – Brazil’s real and Mexico’s
peso hit their strongest levels in more than 2 years on Friday,
but further gains ahead may be limited by increased
intervention in Brazil and heavy positioning in the peso.

Investors were expecting tough new measures from Brazil
this week, but a tax on foreign debt held by locals fell far
short of expectations, and investors bet policymakers had lost
their nerve to impose severe capital controls.

The real surged this week by nearly 3 percent in its
biggest weekly gain in a year week as investors tested the
resolve of authorities to contain currency strength that is
hurting local manufacturers.

Brazilian officials confirmed to Reuters they were
unwilling to impose — at least for now — more severe capital
controls to weaken one of the world’s most overvalued
currencies. [ID:nN01172691]

After trying a range of measures to contain gains in the
real, policymakers are left with drastic capital control
options that could spur sharp losses – and further inflame
inflation by making imports more expensive.

“The government’s increased concerns about inflation and
its effects on the population’s real income are probably
driving this increased tolerance for currency strength,” said
Nick Chamie, head of emerging market research at RBC Capital Markets in Toronto.

The real (BRBY: Quote, Profile, Research) bid 1.16 percent firmer at 1.61 per dollar
on the local spot market, its strongest levels since August

The currency blew past the 1.65 per dollar level that was
considered authorities unofficial limit, and now the market
expects the next line in the sand to be drawn around 1.60 per
dollar level.

Brazilian authorities have been trying to block unwanted
flows attracted to the country’s double-digit interest rates,
but investors continue to find ways around each new barrier.

The central bank did its best to contain the real’s gains,
holding three auctions in the spot market, in a marked increase
in of its efforts. Increased intervention by the central bank
would likely contain further gains next week, analysts said.

Supporting demand for riskier emerging market assets, U.S.
employment recorded a second straight month of solid gains in
March. [ID:nNOAT00477]

The gains were seen as solid enough to keep up confidence
in the U.S. recovery, but not strong enough to discourage the
Federal Reserve from its ultra-easy monetary policies that has
boosted the appeal of higher yielding Latin American debt.

“This is helping risk appetite, and should carry emerging
market currencies stronger as economic prospects improve,”
Chamie said.

Mexico’s peso (MXN=: Quote, Profile, Research) gained 0.41 percent to 11.84 per
dollar. The currency touched its strongest level since October
2008 and gained around 1 percent this week.

The currency has benefited from signs of an improving
economic recovery in the United States, its top trading
partner, as well as expectations that Mexican authorities will
not increase their current pace of building dollar reserves.

However, so many people are betting on a stronger peso,
that the lack of important U.S. economic data next week to back
up optimism could leave the currency open to profit taking.

Data showed a net $3.7 billion in speculative futures
contracts betting on a stronger peso, the highest number of
speculative contracts of the eight major currencies tracked by
Reuters. [ID:nN01141556]

“If we get a negative shock, (the peso) will turn around in
a second,” said Roberto Melzi, a strategist at Barclays

Chile’s peso hit a three-week high, boosted by market
expectations of another 50 basis-point interest rate increase
in April following publication of central bank minutes from the
March rate-setting meeting. [ID:nN01110945]

The peso (CLP=CL: Quote, Profile, Research) bid 0.42 percent stronger at 475.5 per
dollar, for an around 0.7 percent advance for the week.

EMERGING MARKETS-Brazil real, Mexico peso mark 2008 highs