The Mexican peso firmed on Friday after higher than expected inflation backed bets Mexico's central bank will be unable to further lower borrowing costs in the coming months, while Brazil's real was flat.
Mexican inflation picked up more than expected in early March, overshooting the central bank's 4 percent ceiling just weeks after an interest rate cut in Latin America's No 2 economy. Minutes from the March 8 meeting were released on Friday, and they hinted that policymakers could cut interest rates again if economic growth weakens.
Analysts said policymakers will want to lower borrowing costs again if the peso continues to surge, potentially hurting exporters. But the jump higher in consumer prices could keep the central bank from moving anytime soon to lower borrowing costs.
"An acceleration of inflation pressures (even above what the board expected) might make it hard for the board to continue cutting in the coming months even if there is further economic weakness," Nomura analyst Benito Berber wrote in a note to clients. "Therefore, we expect the peso to continue rallying," he said.
Mexico's peso gained 0.7 percent to 12.3540 per dollar, heading back near a more than 1-1/2 year high hit earlier in the week. Reports during the session that Cyprus was nearing a deal to prevent a collapse of its banking system encouraged investors to pour money into higher-yielding emerging market stocks and currencies.
The peso also has been helped by investor confidence that the new government will be able to push long-stalled economic reforms through a divided Congress. Mexican lawmakers approved early on Friday a sweeping telecommunications bill that is aimed at fostering competition in the industry.
Despite the increased appetite for risk, the Brazilian real bid flat at 2.0095 per dollar, staunching early losses after weakening in the previous two sessions as greenbacks flowed out of the country. Outflows from Brazil totalled $726 million in the first 20 days of March and more than $3.2 billion since the beginning of the year, according to central bank data.
"Dollars have been in short supply since December," said Reginaldo Siaca, a manager at Advanced brokerage in Sao Paulo. He forecast the central bank may soon intervene in the market if the exchange rate continues to depreciate towards 2.03 reais per dollar. Reinforcing expectations of government action, Brazil's central bank president Alexandre Tombini said in an event in Sao Paulo that the bank stands ready to intervene to ensure the currency market works properly.
In Argentina, peso trading on the black market shrivelled on Friday after government officials reportedly pressured players to freeze operations before the Easter holidays begin late next week, traders in Buenos Aires said. The Argentine peso closed at 8.42/8.48 per dollar on Friday, according to Reuters, easing back after the ask price surged to 8.75 per dollar on Wednesday amid uncertainty over the government's currency policy. On the official interbank market, the peso was trading at 5.11/5.1125 per dollar. This represents a 66 percent gap, or spread, versus the black market.