RIO DE JANEIRO: Venezuelan bonds rallied on Thursday to 2008 highs on rumors about President Hugo Chavez's health, three weeks after a challenging cancer surgery in Cuba, while the Argentine peso sank past the level of 7 per dollar for the first time in the black market.
Most Latin American currencies were steady, however, as investors turned more cautious over future US budget battles after a last-minute deal to avoid the so-called "fiscal cliff" triggered a global rally in the first trading session of 2013.
Venezuelan assets rallied on speculation that Chavez will not be able to be sworn in as president on Jan. 10, triggering a constitutional provision that calls for new elections within 30 days.
"The speculation is that he is actually in much graver condition that what has been announced," said Enrique Alvarez, head of Latin America strategy for IDEAglobal in New York.
Venezuela's global bond due in 2027, one of the most traded debt instruments issued by the oil-exporting nation, jumped 2.9 points in price to bid 102.681. They paid a yield of 8.916 percent, the lowest since early 2008.
Venezuelan 5-year credit default swaps, which offer protection against the risk of a sovereign default, tightened 37 basis points to 567 basis points, their cheapest since early 2008, according to Markit.
IDEAglobal's Alvarez believes, however, that yield-hungry investors might be disappointed by bets that seem to assume that Venezuela will have an easy government transition.
"A straightforward replacement of a socialist government by a more market-friendly government isn't a given and I think the market is way ahead of itself," he warned.
Elsewhere in Latin America, some investors pocketed part of the recent rally which sent the Mexican peso more than 1 percent higher on Wednesday, when markets reacted to news that US lawmakers had struck a deal to avoid steep tax hikes and spending cuts that could derail the recovery of the world's largest economy.
The deal removed a key source of uncertainty in the short term, but fights over further spending cuts and another showdown about the US federal debt limit may still rock markets in a couple of months.
Trading volumes were thin in a shortened holiday weekend, and many investors avoided building strong investment positions.
The Mexican peso was practically unchanged at 12.75 per dollar while the Brazilian real edged 0.4 percent higher to 2.0365 per dollar.
Many economists expect the real to stabilize near 2.05 per dollar for now after a series of central bank interventions late last year indicated policymakers wish the currency to trade around that level -- which would support exporters without creating excessive inflation pressure.
"The central bank may again use the exchange rate to curb inflation," said Jaime Ferreira, a manager at the currency desk of Intercam brokerage in Sao Paulo.
Economists forecast Brazil's consumer inflation to run near 5.5 percent this year, above a government target of 4.5 percent with a tolerance margin of 2 percentage points.
DEMAND FOR DOLLARS SOAR IN ARGENTINA
In Argentina, the peso plunged 1.7 percent in the black market to 7.03 per dollar, its weakest price on record, as Argentinians tried to skirt government controls to buy the greenback as they vacation abroad.
At that level, the black-market peso was more than 40 percent weaker than the official exchange rate of 4.9 per dollar.
"What we feared has happened: we pierced the level of 7 pesos per dollar and the peso keeps weakening as Argentinians can't get greenbacks in the official market and many of them have plans to travel abroad," said a trader in Buenos Aires.
Center>Copyright Reuters, 2013