Mexico's peso firmed on Friday as policymakers dashed speculation of imminent rate cuts, while the Brazilian real trimmed early losses after the country's central bank intervened in the foreign exchange market. Other Latin American currencies remained weaker, however, as investors worried about the global economic impact of the escalating European debt crisis.
The Mexican peso traded lower early in the session but bounced after the central bank kept its key interest rate unchanged at 4.5 percent. The bank made clear its next move could go either way, dropping a flirtation with a rate cut that had weighed on the currency. The bank also acknowledged a "moderate" risk to inflation from a weaker peso, which has lost about 10 percent since mid March.
"The Bank of Mexico at this exchange rate will not cut rates even if everyone else in the world does it, and foreigners do not want a rate cut because they are taking advantage of the differential," said Jorge Gordillo, an analyst at CI Banco. Mexico's benchmark interest rate is at 4.50 percent, compared with a near zero percent in the United States, a differential that boosts the appeal of Mexican assets.
The Mexican peso was more than 1 percent stronger in the afternoon at 13.9225 per dollar. The Brazilian real also opened lower but trimmed losses after the central bank intervened in the foreign exchange market with a sale of currency swaps, which essentially increase the supply of dollars in the market.
It was the second time the central bank offered to sell currency swaps this week. The auction was announced when the real traded slightly above 2.04 per dollar, reinforcing a market perception that, at least for now, policymakers are drawing an informal line around 2.05 per greenback. "When the real reaches a certain level, of 2.05 per dollar, we know the central bank will intervene," said Jankiel Santos, chief economist with BES Investimento in Sao Paulo.
The real was 0.14 percent stronger in the afternoon, at 2.0236 per greenback. Other Latin American currencies weakened as investors cautiously watched political and economic developments in the euro zone. Spain is expected to request European aid for its struggling banks over the weekend, becoming the fourth and biggest European country to seek assistance since the euro zone's debt crisis began. Chile's peso lost 0.32 percent to 502 per dollar as prices of copper, the country's main export product, fell to a six-month low in London.
Chile's lower-than-expected inflation reading for May also contributed to a weaker peso as it eliminated any speculation of an immediate rate hike by the central bank. Chile's consumer price index was unchanged in May from the previous month, the government statistics agency INE said. Analysts polled by Reuters had forecast a median 0.2 percent increase for the index.
Brazil's interest-rate futures slid on Friday after the central bank suggested it is poised to keep cutting the country's base interest rate. The bank's committee, known as the Copom, repeated its guidance that more rate cuts should be conducted "sparingly." Policymakers unanimously cut the benchmark Selic rate for a seventh consecutive time to a record low of 8.5 percent on May 30.
"This leaves the door open for additional rate cuts," said Alberto Ramos, a senior economist with Goldman Sachs, adding that the next cuts should be "moderate," or smaller than 75 basis points, and "somewhat data dependent." Goldman Sachs expects Brazil will cut the Selic again to 8.0 percent in July.