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EMERGING MARKETS-Latam FX jumps on recovery hopes; Brazilian real leads advance

Shreyashi Sanyal
·3 min read

* Brazil inflation ends 2020 above target, highest in four years * Mexico industrial output beats expectations in November * Chilean peso continues to weaken on lower copper prices (Updates prices throughout, adds background) By Shreyashi Sanyal Jan 12 (Reuters) - A gauge for Latin American currencies rose for the first time in 2021 on Tuesday, with Brazil's real leading the charge as hopes of recovery were buoyed by improving economic data and a recent rally in the dollar cooled. The MSCI's index for Latin American currencies rose 2.08%, on track for its best day since late July 2020. The Brazilian real gained over 3%, after sliding to a two-month low against the dollar on Monday. A growing consensus shows that the tides of economic growth, interest rates and commodity prices are turning in the currency's favor. "Brazil has lagged while Mexico has outperformed and positioning has diverged, with Mexico at the highest allocation in three years and Brazil at the lowest. Further out, Brazil faces clear fiscal issues, yet this should not stop Brazil performing well in early 2021," strategists at Morgan Stanley wrote in a client note. However, Morgan Stanley cut its outlook for emerging market currencies overall to neutral from "bullish," citing higher U.S. yields and little improvement in fundamentals. Official figures from Brazil showed annual inflation ended last year at 4.5%, comfortably above the central bank's year-end target as food prices rose the most in nearly two decades. Brazil's Central Bank Monetary Policy Director Bruno Serra said it was natural to imagine that the "extraordinary stimulus" that the Central Bank is granting to the economy via monetary policy will be removed from the scene in any moment. Mexico's peso rose 1.1% against the dollar a day after data showed the Mexican manufacturing sector's recovery from the pandemic slump had slowed in November but was stronger than forecast. Mexico's currency recently came under pressure from lower oil prices, which has also hurt crude-exporter Colombia's peso . A recovery also ensued in emerging market currencies in Europe on Tuesday, after steep losses last week to a rebounding dollar, while stocks held near record highs as increased liquidity and low lending rates boosted demand for equities. Emerging market assets have been under pressure in the last week from continued dollar strength and higher yields, which are seen as a negative. The Chilean peso was among the few currencies which were lower on Tuesday, falling 0.8%, pressured by weakening copper prices. Shanghai copper fell to a one-week low, hit by demand concerns amid new curbs to fight a resurgence of coronavirus cases in China, the world's biggest metals consumer. Key Latin American stock indexes and currencies at 1918 GMT: Stock indexes Latest Daily % change MSCI Emerging Markets 1356.60 0.52 MSCI LatAm 2525.19 2.24 Brazil Bovespa 123984.39 0.59 Mexico IPC 46039.52 -0.77 Chile IPSA 4599.70 1.04 Argentina MerVal 51100.24 0.26 Colombia COLCAP 1457.77 0.32 Currencies Latest Daily % change Brazil real 5.3361 3.09 Mexico peso 19.8290 1.16 Chile peso 725.2 -0.83 Colombia peso 3474.75 0.50 Peru sol 3.6097 0.06 Argentina peso (interbank) 85.4600 -0.09 Argentina peso (parallel) 155 2.58 (Reporting by Shreyashi Sanyal in Bengaluru; editing by Jonathan Oatis)