EMERGING MARKETS-Latam currencies drop on concern about Chinese rates

Reuters

RIO DE JANEIRO, Oct 23 (Reuters) - Latin American currencies

weakened on Wednesday after a spike in Chinese money market

rates added to concerns that policymakers may withdraw monetary

stimulus in China, the largest consumer of Latin American

commodity exports.

The Chilean peso was the hardest hit, dropping more

than 1 percent, as China is a major buyer of the country's

copper exports.

Copper prices slid 2 percent after a policy adviser

to the People's Bank of China told Reuters the authority may

tighten cash conditions in the financial system to address

inflation risks.

The sell-off in Latin American currencies follows a day of

gains that had been spurred by bets that the Federal Reserve

would keep its monetary stimulus program in place for longer to

offset the negative economic impact of a 16-day government

shutdown earlier this month.

* The Mexican peso dropped 0.8 percent with investors

cautiously awaiting a key central bank decision on monetary

policy later this week.

* Most analysts expect the Mexican central bank to cut its

benchmark interest rate for the second month in a row on Friday,

by 25 basis points to 3.5 percent, while calls for a more

aggressive 50-basis-point interest rate cut started to emerge.

* "Despite the easing, we remain broadly optimistic on

Mexican peso," strategists with Brown Brothers Harriman wrote in

a research note, arguing that a possible disappointment about

the calls for a 50-basis-points cut in Mexico could give the

peso a short-term boost.

* Brown Brothers Harriman also recommended investors buy the

Mexican peso against the Brazilian real. "We think the real is

forming a base around the 2.15 (per dollar) level, around where

the Brazilian government is likely to push back against further

appreciation of the real," they said.

* The Brazilian real weakened 0.6 percent to

2.1841 per dollar, also pressured by expectations that the

central bank will not roll over all of the $8.9 billion worth of

currency swaps that expire early next month. The swaps are a

hedge against a possible depreciation of the real.

* So far, the bank has sold 40,000 currency swaps worth

nearly $2 billion to roll over the November maturities. Analysts

expect policymakers to conduct one final roll-over auction on

Thursday, possibly offering an additional 20,000 swaps worth

about $1 billion.

Latin America FX prices at 1715 GMT:

Currencies daily % YTD %

change change

Latest

Brazil real 2.1841 -0.64 -6.60

Mexico peso 12.9435 -0.76 -0.61

Chile peso 505.1000 -1.11 -5.23

Colombia peso 1884.0000 -0.22 -6.26

Peru sol 2.7630 -0.33 -7.67

Argentina peso 5.8600 0.04 -16.17

Argentina peso 10.0900 -0.10 -32.80

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