SAO PAULO: Latin American currencies advanced for a second day on Monday after China's central bank allowed the yuan to strengthen, easing global concerns following a week of deep risk aversion.
Worries over global economic weakness and a continued slump in oil prices hurt demand for emerging market assets last week while Chinese markets were closed for the Lunar New Year holiday.
Nevertheless, China's central bank fixed the yuan at its highest rate this year and played down speculation that it could adopt capital controls. Offshore rates for the yuan posted its biggest rise since 2005, eliminating a gap with the onshore rate that had stoked fears of capital outflows.
The move allayed concerns that a weaker yuan could generate worldwide deflationary pressure, hampering the global economic recovery. A stronger currency at the world's biggest consumer of
commodities could also boost trade with Latin American countries, typically big exporters of basic products.
The Mexican peso and the Colombian peso strengthened after hitting all-time lows last week, though trading volumes were thin due to a US holiday. Both currencies also benefited from a recovery in oil prices amid speculation that OPEC could agree to cut production.
However, analysts expected the relief to prove short-lived. Colombia's peso should trade between 3,500 and 4,000 per US dollar over the following quarters, compared to about 3,400 currently, strategist Mario Castro at Nomura Securities said in a client note.
He expects the country's central bank to react by increasing its benchmark rate by an additional 100 basis points, to 7.0 percent, seeking to fight growing inflation expectations.
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