Latam FX dips; Mexico's peso falls ahead of rate decision

Mexico's peso dropped on Thursday ahead of an interest rate decision, while most other Latin American units retreated amid tempered expectations for the availability of a coronavirus vaccine.

The peso fell about 0.2%, and was also hurt by weakness in the oil market after the International Energy Agency raised doubts about a quick post-COVID-19 pickup in demand.

Still, the currency is among the best performing Latam units this year, having benefited recently from expectations of better trade ties with the United States after Joe Biden took the presidency.

Strength in the peso and higher inflation trends have split investor expectations for a rate cut later in the day. Mexico's central bank has also avoided the aggressive rate-cutting cycles adopted by its regional peers.

"The recent MXN rally has contributed to muddle the waters somewhat however, as it has intensified calls for a more dovish policy outcome... we expect policymakers to weigh the slight deterioration in inflation against the stronger FX dynamics," Gustavo Rangel, chief economist, LATAM, at ING, wrote in a note.

"Despite the positive vaccine news, the risk of financial market instability remains elevated with the resurgence of Covid-19 cases in the US and Europe and the uncertain global growth outlook."

A Reuters poll expects Mexico's central bank to cut by 25 basis points to 4.0%. Ratings agency Fitch on Wednesday affirmed the sovereign rating of Latin America's second-largest economy at BBB-.

Colombia's peso fell about 0.5%, as it also came under pressure from weak oil prices.

Brazil's real bucked the trend, rising 0.4% after data showed services activity rose more than expected in September, suggesting that certain facets of Latin America's largest economy were picking up from the pandemic.

The real was also boosted by positive comments from Economy Minister Paulo Guedes.

While regional currencies and stocks benefited from optimism over a vaccine earlier in the week, uncertainty over the availability of the vaccine, as well as continued signs of the pandemic's economic impact prompted some unwinding in risk appetite.

Chilean stocks led losses across the region, falling about 1%. The MSCI's index of regional stocks was largely unchanged.

Peru's sol was stable, but trading close to 18-year lows as the country's new cabinet took shape on Wednesday after the ouster of centrist President Martín Vizcarra on Monday plunged the country into turmoil.