US growth fears hit Latam FX, hurt Mexico most

By Michael O’Boyle

MEXICO CITY (Reuters) – Latin American currencies weakened Wednesday as growing fears about slowing U.S. growth drove Mexico’s peso to a two-month low on concerns its exports could suffer due to weaker U.S. demand.

Federal Reserve Chairman Ben Bernanke said late Tuesday the U.S. recovery remained fragile. His comments followed a spate of economic data pointing to a slowdown in the world’s biggest economy.

“This is going to affect Mexico the most,” said Francisco Diez, director of emerging markets trading at RBC Capital Markets in New York. Mexico sends around 80 percent of its exports to its northern neighbor.

The peso shed 0.5 percent to 11.8395 per dollar.

The cost of dollars in pesos shot up to just below the 100-day simple moving average. Analysts at Citigroup said if the peso closes weaker than 11.80 per dollar, it may slide further toward the 200-day moving average around 12.14 pesos per dollar.

Concerns about slowing U.S. growth drove investors into perceived safe-haven assets such as U.S. bonds. The rest of Latin America’s major currencies also weakened.

Analysts noted the dash for safe-haven assets drove the yen below 80 per dollar, which pushed some investors out of “carry trade” bets in favor of Latin American currencies.

In the carry trade, investors borrow money in lower-yielding currencies to buy currencies of countries where interest rates are higher.

Ultra-low U.S. and Japanese rates have helped push a tide of investment into Latin America during the recovery from the financial crisis.

High interest rates in Latin America should help provide a floor for currency losses and entice investors to place fresh bets in favor of further gains, analysts said.

Slower U.S. growth suggests the Fed could keep U.S. interest rates down for longer than expected.

“I still do not think the market will get overly carried away. We will just weed out the weak carry trades, mostly through the yen,” said Enrique Alvarez, head of Latin America research at IDEAglobal in New York.

“Once you bleed them out, the fundamentals tell you that if there is weak growth and sustained low rates, that is still a positive for Latin American currencies.”

The Brazilian real bid 0.32 percent weaker at 1.5810 per dollar. President Dilma Rousseff’s chief of staff resigned in a political scandal over his personal wealth, but analysts said the news had little impact on the currency.

Brazil is expected to raise its benchmark interest rate by 25 basis points to 12.25 percent later Wednesday, increasing the interest rate differential above rates in developed markets and likely supporting the currency’s allure.

Chile’s peso bid down 0.19 percent to 467.20 per dollar.

Inflation data in Chile quickened to 0.4 percent in May, more than market expectations for a 0.3 percent increase but not enough to change bets that the central bank will moderate its pace of recent interest rate hikes at a policy meeting next week.

Peru’s sol bid 0.5 percent stronger at 2.7730 per dollar a day after ratings agencies Moody’s and Standard & Poor’s said the country’s investment grade credit ratings were not at risk from left-wing Ollanta Humala’s win in Sunday’s presidential election.

Peru markets tumbled Monday as investors worried about the narrow victory of the former army officer, who once sympathized with Venezuelan President Hugo Chavez. (Additional reporting by Caroline Stauffer in Lima; Editing by Dan Grebler)