Latam currencies gain as European crisis eases

Latin American currencies gained against the US dollar on Friday, trimming or erasing weekly losses, as Italy moved to shore up its budget against soaring debt costs and Greece chose a new prime minister. Brazil's real gained 1.02 percent to 1.7429 to the dollar, trimming weekly losses to 0.1 percent, nearly unchanged from last Friday. Mexico's peso firmed 0.12 percent to 13.5140, trimming weekly losses to nearly zero.
The peso trimmed early Friday gains after Interior Minister Francisco Blake was killed in a helicopter crash. The gains came as Italy's Senate approved a package of austerity measures to prevent the country's debt, which is 20 percent larger than its annual economic output, from spinning out of control. The lower house is expected to approve the austerity package this weekend.
Meanwhile, Greece appointed a new prime minister, opening the door for the country to pass measures required under a bailout agreement aimed at preventing a debt default. Default in either Greece of Italy could cripple international financial institutions, causing credit and growth to grind to a halt world-wide.
"Italy and Europe continue to dominate the markets and things look a bit better today," said Pedro Tuesta, currency and bond analyst at 4cast Inc in Washington. "If Italy's lower house approves budget measures this weekend, we may have a week where we are clear of bad news for the time being." Friday's gains could be sustained into next week, receiving added support from economic data in the United States, Tuesta said. Commercial and employment data is likely to show the world's largest economy is growing faster than many expected.
The Mexican peso, however, is unlikely to gain beyond 13.35 per dollar, a point close to the peso's 50-day moving average, he added. "All recent efforts to move beyond 13.35 have ended in tears," he said. For Jeff Lines, an emerging market trader at TD securities in Toronto, the most likely outcome for Latin American currency markets next week would be slight gains followed by a return of concern about the impact of the European debt crisis.
"I think the market has gotten hopeful that something is going to come out over the weekend," he said. "I suspect that whatever it turns out to be, we could get a brief rally but then reality will set back in." For Lines that means banks are reducing lending to protect themselves against potentially massive bond losses from Greece and Italy, a move that is choking off credit to the world economy. It also means that the European Central Bank is unlikely to provide enough loans or buy enough European debt to reassure banks and investors that their investments in European bonds are safe.
"With the market focused on Italy now instead of Greece it is a major, major problem," Lines said. "Italy is too big to save and I don't think the ECB is anywhere near being able to step in and really do a whole lot." Banks "deleveraging" will reduce their lending to companies doing business in emerging markets, undermining trade and asset prices in places such as Latin America.
Markets still expect growth to remain robust as copper and other commodities rose in the wake of Italian and Greek developments. Many Latin American economies are heavily dependent on raw materials exports. Chile which gets more than half of its export earnings from a single commodity, copper, saw its peso gain 0.8 percent to 497.50.
Copper for delivery in three months rose 2.39 percent to $7,649.75 a tonne in London. Chile is the world's largest producer of the metal, a key component of electronic and electrical equipment. Peru's sol firmed 0.15 percent to 2.7020 to the dollar. Peru is the world's second-largest producer of copper. Trading in many markets was lighter than normal, traders said, as many US investors and banks took time off to celebrate the country's Veterans Day holiday.