Latam FX gains on dovish US outlook; Mexican central bank awaited

Latin American currencies hit a three-week high on Thursday as a dovish US economic outlook bolstered risk-driven assets, while Mexico's peso hit a near three-week high ahead of a central bank meeting later in the day.

Colombia's peso led gains across the region with a 1.1% rise, while MSCI's index of Latam currencies hit its highest level in three weeks.

Strength in oil prices supported the currencies of exporters Colombia and Mexico.

Mexico's peso rose 0.4%, with analysts expecting the Mexican central bank to cut rates in order to push up inflation.

The bank had paused a cutting cycle late last-year after a temporary spike in inflation. But with core prices remaining low, it is expected to trim interest rates further to 4.0%.

"Inflationary pressures have declined, which should make the bank's board comfortable about resuming the easing cycle," Credit Suisse analysts wrote in a note.

"Other factors supporting our view include the stability of the Mexican peso and the apparent reduction in the likelihood that Congress may force the central bank to become a buyer of last resort of foreign bills and coins from commercial banks in Mexico."

The country's ruling party had last week sidelined a bill that would require the central bank to buy up cash that commercial lenders cannot offload, which had sparked criticism that it could force the bank to absorb the proceeds of organized crime.

The US dollar and Treasury yields retreated after benign US inflation and dovish indications from the Federal Reserve pointed to policy staying accommodative in the near-term. This in turn pushed investors into higher-yielding emerging market assets.

Chile's peso hit a three-week high on continued strength in copper prices.

But Brazil's real lagged its peers for a second day, as data showed services activity in the country unexpectedly fell in December due to a second wave of COVID-19 cases.

Concerns over stretched fiscal spending have hurt the real, despite the prospect of quicker-than-expected rate hikes by the central bank.

Brazil's central bank president Roberto Campos Neto also warned that an economic recovery in Latam's largest economy was losing steam.

Bets on more US stimulus and steady vaccine rollouts have driven investors into riskier assets such as EM equities , which hit a record high on Thursday. But Latam stocks , which rose in early trade, have lagged their peers through 2020.