Latam currencies firm; real hits 34-month high

RIO DE JANEIRO: Latin America's currencies gained against the US dollar on Thursday and Brazil's real closed at a 34-month high on expectations the region's economies will outperform developed markets.

As US jobless data underlines weakness in the world's largest economy and Europe faces a Greek default and credit crunch, Latin America is growing and paying investors high returns, said Andre Ferreira, partner at Futura Corretora, a Sao Paulo brokerage.

"People are waking up to the fact that our economies are strong and well-protected against external shocks," Ferreira, who runs the Futura's foreign-exchange operations, said. "In Brazil we've built up a lot of fat in the system to protect us from shocks."

Brazil's real firmed 0.6 percent to 1.560, its strongest close since Aug. 1, 2008. Earlier it reached 1.557, a 34-month intraday high. It closed the month 1.4 percent stronger than in May.

Mexico's peso gained 0.5 percent to 11.7238, its strongest in four weeks. It shed 1.2 percent on the month.

Thursday marked the last day Brazil will adjust its benchmark "Ptax" exchange rate for trading volume. The adjustments led to concerns the country's large dealer banks could manipulate the rate by booking lots of offsetting, and otherwise unnecessary, trades.

Suspicion was usually most acute on days like Thursday, a month-end settlement date for futures. The change is expected to make the market more transparent and perhaps smaller.

Starting on Friday the Ptax, used to settle everything from export and tax payments to currency futures contracts and foreign loans, will be a simple arithmetic average of four daily price soundings.

The real has hit record levels along with record bets the currency will gain further.

The so-called "speculative net longs" on the real jumped 3.3 percent to $22.01 billion, an all-time high, on Wednesday a sign of confidence in the currency.

"The problems in the rest of the world are so high and we have so many means by which to cushion ourselves that it makes sense to put money here," Ferreira said.

The heavy long position, though, is also a potential point of weakness. If something like a Greek default causes prices to fall, investors who have bet on the real with borrowed money could get squeezed. Forced to sell reais to cover losses, declines would speed up.

Ferreira, though feels Brazil is much better protected than in 2008 when the US sub-prime crisis led to such a squeeze, causing the real to plunge nearly 40 percent in four months.

If a Greece default led to a quick outflow of money from Brazil, the country's $336 billion of foreign currency reserves would limit any panic, he said.

Greek default concerns also eased after the country's parliament approved austerity and privatization bills on Thursday. Passage opens the country up to new aid to help stave off default on 340 billion euros ($493 billion) of debt.

Meanwhile direct investment continues to flow to Brazil, said Richard Martin, senior director at Merrill DataSite, a business communications and information company, in New York.

A survey of 500 Brazilian and foreign business executives in May found 75 percent planned to increase spending in the country over the next 12 months. They planned to up their spending despite inflation concern and legal risks.

"The distinction between risk in Brazil and risk in the developed world is less and less," Martin said in an interview. "When that's the case it makes sense to go where the returns are, and right now that's Brazil."

Others are less sanguine about the region's currencies ability to withstand a US downturn, an increase in interest rates by the European Central Bank (ECB) or a Greek default.

Continued US weakness could undermine a nearly 2 percent rally in the Mexican peso since June 16 and the real's more than 3 percent gain since May 13, said Marc Chandler, head of currency strategy at Brown Brothers Harriman in New York.

"I think that in the short run, into the middle of next week, money supply still goes into emerging markets," he said. "What concerns me in the second half of next week is the ECB's rate hike, and the fact that the US comes out with unemployment data and it looks like the US is going to report soft employment data, so global growth issues can come back." Elsewhere in Latin America, Chile's peso gained 0.4 percent to 467.70 to the dollar, and little changed on the month.

Colombia's peso 0.6 percent to 1,769 1.1 percent stronger than in May. Peru's sol gained 0.1 percent to 2.7490, 0.6 percent firmer than at the end of May.

Copyright Reuters, 2011