Latam currencies slide in world growth

RIO DE JANEIRO: Latin American currencies slipped against the U.S. dollar on Wednesday as weak U.S. employment data and slowing international factory outlooks undermined world growth expectations.

"There is widespread evidence of slowing not just in the United States but in China too," said Enrique Alvarez, head of Latin American research at in New York.

"Add numbers in Brazil that are quite notorious in showing a slowdown, and that spells weakening throughout Latin America today."

Brazil's real shed 0.51 percent to 1.586 to the dollar. Chile's peso slipped 0.26 percent to 465.90. Mexico's peso weakened 0.45 percent to 11.6365.

Brazil and Chile are heavily dependent on raw materials sales to world factories. Mexico relies on exports to the United States.

Factory growth eased in Europe and Asia in May, surveys of industrial purchasing managers showed on Wednesday, raising concern about a world-wide economic slowdown

Meanwhile private employers in the United States added 38,000 jobs in May, less than a quarter of the 175,000 average expected in a Reuters survey of economists. The result was the worst since September

Industrial output in Brazil, the world's eighth-largest economy, dropped a bigger than expected 2.1 percent in April compared with a year earlier, the government statistics agency said Tuesday.

The drop was the largest since December 2008.

Commodities prices, the backbone of many Latin American economies, fell on the factory and jobs reports too.

The Reuters/Jefferies CRB index of 19 principal commodities fell 0.23 percent to 349.25, on track for its second decline in six days.

Copper, responsible for more than a third of Chile's export earnings fell 1.09 percent to $9,115 a tonne.

Peru's sol weakened 0.36 percent to 2.776 to the dollar, its lowest intraday price since May 13. Peru is one of the world's largest producers of gold, copper and zinc.

If evidence of world economic slowing continues, currencies may weaken further this week, Alvarez said.

Moving forward, fundamental factors still argue for strengthening, particularly for the Brazilian real, Mexican peso and Colombian peso, he said.

The Institute for International Finance, an international banking organization, increased its estimate for private capital flows to emerging markets in 2011 by $81 billion in a report released today. Of that increase, more than half, or $44.8 billion, is expected to go to Latin America.

Colombia, which had its foreign currency debt upgraded to investment grade yesterday by Moody's, bucked the regional weakening trend on Wednesday. Its peso was unchanged from Tuesday at 1,765.00 to the dollar."Overall you're getting some cooling in Latin America and that's not all bad," Alvarez said. "That should slow inflation expectations and help the region return to more sustainable growth."

In an environment of weak U.S. growth and more sustainable Latin American expansion, he said, the region's higher interest rates will start sucking investment to the region again, causing its currencies to firm.

Interest rates of 12 percent in Brazil, 4.5 percent in Mexico, 5 percent in Chile and 4 percent in Colombia are far more attractive than in the United States, where rates are near zero or in Europe or Japan where rates are barely higher, he said.

Indeed, investors are already in the hunt for higher yield in Mexico. Buying after the U.S. jobs data drove Mexican bond prices up and yields to their lowest in almost six months.

With U.S. rates likely to stay low to help boost a sluggish economy, Mexican debt becomes attractive, said Roberto Melzi, a fixed-income strategist at Barcalys in New York.

The yield on Mexico's benchmark 10-year peso bond bid down 5 basis points to 6.88 percent.

Even with the decline, Mexican bonds yield an average 1.43 percentage points more than comparable term U.S. Treasuries, according to JPMorgan

Copyright Reuters, 2011