Mexican peso leads Latam FX slide as dollar rallies

Mexico's peso hit near six-week lows on Wednesday as the country's financial stability council warned the coronavirus pandemic still posed risks, while most other Latam currencies slipped as the dollar strengthened.

MSCI's index of Latam currencies slipped 0.2% to its lowest in more than one month.

Mexico's peso dropped 0.6% to lead declines among Latam peers, a day ahead of a central bank policy meeting.

The economic and financial environment in Mexico continues to be influenced by the evolution of the pandemic, the Financial Stability Council said. Mexico's confirmed cases of the disease stood at over 3.5 million as of Tuesday while the death toll rose to 276,376.

The council also pointed to risks from a potential downgrade of the credit rating of state oil company Pemex. Latam's most indebted company, Pemex has been a weight on Mexico's sovereign credit rating, pressuring the country's financial assets.

On Thursday, the central bank is seen hiking the benchmark interest rate by 25 basis points to 4.75% as inflation accelerated faster than expected during the first half of September to 5.87%, above the target rate of 3%.

Brazil's real outperforms Latam peers

Credit Suisse analysts expect the vote to be split, with two board members voting in favor of no change in the overnight rate. They are watching for inflation forecasts.

"We think that the bank will increase its inflation projections by 10bps-20bps for the third quarter of 2021, from 5.6%, and by a more meaningful amount (up to 40bps) for the final quarter of the year..."

In Chile, the peso fell 0.1% to stay close to near one-year lows hit on Tuesday.

Chile's lower congressional chamber on Tuesday approved a bill that would allow citizens to make a fourth withdrawal from their pension funds, and sent it to the Senate for a vote, despite opposition from the government.

"Markets were likely already pricing risks that the bill would pass the lower house, and we expect rates to continue to underperform into the senate vote.

Chilean dollar bonds maturing in 2025 and 2026 hit their lowest since the second quarter of 2020.

Brazil's real extended losses to a sixth straight session, while in Argentina, economic activity rose 11.7% in July versus the same month a year earlier, official data showed on Tuesday, comfortably ahead of analyst forecasts.

Among stocks, Sao Paulo's Bovespa index recovered 0.6% after a 3% tumble on Tuesday. Material stocks led gains, with iron ore miner Vale being the biggest boost as prices of the steel-making ingredient jumped 2%.