Brazil's real to outperform Latam peers for week, but sentiment weak

SAO PAULO: Brazil's real rose on Friday and was set to outperform its Latin American peers for the week amid some improving economic readings, with most other regional risk assets also set for weekly gains.

The real rose 0.4%, and was set to add nearly 4% for the week. Inflation in Brazil rose in July at its fastest pace in six months thanks to rising transport and fuel costs, but at a far slower rate than economists had expected.

Still, the reading indicated that economic activity was picking up after the scaling back of coronavirus-driven lockdowns, a trend that has been reflected across the rest of Latin America as well.

The real has recovered sharply from record-low levels hit in May, thanks to sustained intervention from the central bank. But local central bank officials have expressed concerns over being able to manage heightened volatility in the currency, due to the pandemic.

Bets on a Covid-19 vaccine had driven risk appetite through the week. However, an escalation in Sino-US tensions appeared to be spurring risk-off, going into next week.

China ordered the United States to close its consulate in the city of Chengdu, responding to a US demand this week that China close its Houston consulate. The move saw global equities retreating, with regional equities also falling in tandem. Still, most bourses were set for weekly gains, with Argentine stocks set to outperform their peers.

Argentina's 1.7 trillion pesos ($23.7 billion) of short-term 'Leliq' notes have helped mop up liquidity in the market and hold back rising prices, leaving the central bank with a tricky task to rein in the debt without reigniting inflation.

Mexico's peso rose to the dollar. Data showed the country's economy shrank another 2.6% in May from April after a record decline the previous month. "Although the economy will probably start to improve in the second half of the year given the easing of restrictions in some states, a slow and complex recovery is expected due to a severe drop in investment spending," analysts wrote in a UBS client note.

Bolivia's general election will be pushed back until Oct. 18 due to the coronavirus pandemic, which could fan tensions between the interim conservative government and the socialist party of former President Evo Morales.