RPT-EMERGING MARKETS-Brazil yields sink on election surprise

(Repeats to additional subscribers)

* Mexican peso and Brazil’s real lose 0.5 pct

* Gains by Brazil’s opposition party make traders nervous

* Chile prepares for Thursday’s interest rate decision
(Adds comments, updates prices to close)

By Samantha Pearson and Caroline Stauffer

SAO PAULO/MEXICO CITY, Oct 14 (BestGrowthStock) – Yields on
Brazil’s interest rate futures contracts fell on Thursday as
investors woke up to the possibility that opposition candidate
Jose Serra may soon be the country’s next president.

Until now, investors had been brushing off Brazil’s
election as a “non-event” because ruling party candidate Dilma
Rousseff looked set to sail to an easy victory at the end of
this month, bringing few changes to current policy.

But the most recent opinion poll on Thursday, showing Serra
is almost tied with Dilma, has caused a last-minute scramble on
trading floors. [ID:nN14103392]

“If someone starts believing Serra will win he is going to
prepare for tougher fiscal measures, which would allow interest
rates to fall in the future,” said Paulo Petrassi, a partner at
Brazil’s Leme Investimentos.

The yield on the interest rate futures contract due in
January 2012 (DIJF2: ), the most widely traded, fell 9 basis
points to 11.25 percent from the previous session.

While the election was the main driving force of the market
on Thursday, concerns about global growth were also on
investors’ minds, Petrassi said.

RUSH TO TAKE PROFITS

Weak data on U.S. jobless claims on Thursday added to
concerns about a slowdown in the world’s biggest economy, also
causing the region’s currencies to weaken sharply.

The Mexican peso and Brazilian real were further hit by
profit-taking after both currencies strengthened to key levels
in early trading.

Mexico’s peso weakened 0.5 percent to 12.4480. The peso
appreciated to the 12.35 level earlier in the session, which
triggered a round of profit-taking that weakened the peso to
its session low of 12.4757.

The Chilean peso (CLP=: ) traded flat for most of the morning
before weakening 0.22 percent to 478.8 ahead of a central bank
rate decision expected later in the day.

Minutes of the central bank’s September rate-setting
meeting released last week showed bank board members saw the
peso’s recent appreciation possibly impacting monetary policy.

“Specifically, the minutes mention both the appreciation of
CLP and falling inflation expectations as reasons to, at that
meeting, adopt a slower pace of policy tightening,” a report
from Nomura Securities said.

The Brazilian real (BRBY: ) also weakened, closing 0.48
percent weaker at 1.661 per dollar in the local market.

Traders were quick to take profits after the currency broke
through the closely watched level of 1.65 reais per dollar
earlier in the session.

Recent election polls have also started to unnerve
investors. As well as adopting a tougher fiscal stance, Serra
is expected to take a more proactive role to weaken the
currency and protect exporters.

“Serra has clearly come out in favor of a weaker currency
here,” said Luciano Rostagno, chief strategist for CM Capital
Markets in Sao Paulo.
(Additional reporting by Silvio Cascione in Sao Paulo, Brad
Haynes and Froilan Romero in Santiago; Editing by Dan Grebler)

RPT-EMERGING MARKETS-Brazil yields sink on election surprise