Chile's peso drops 2pc to lead losses among Latam FX; Mexican peso outperforms

Latin American currencies fell on Friday, with Chile's peso looking to post its biggest intraday drop in seven weeks as the dollar gained on its safe haven appeal after US jobs data showed an economic recovery may be plateauing.

Chile's peso slid 2% to hit a three-week low, weighed down also by rising US-China tensions pressuring prices of Chile's biggest export item, copper. Data on Friday showed the country's annual inflation tended toward the low end of the central bank's target range.

Brazil's real crumbled 1.3% as the dollar strengthened after data showed employment in the United States rose more than expected in July but marked a sharp decline from June. Surging COVID-19 cases globally also curbed risk appetite.

Brazil's currency fell about 3.5% this week - its worst weekly decline in more than a month, following an interest rate cut on Wednesday. Latest data showed Brazilian inflation rose in July, but the annual measure remained significantly below the central bank's year-end target.

Analysts had predicted a pick-up in Latam currencies in the second half of the year on hopes that commodity prices would rise. But with the region exceeding 5 million COVID-19 cases as of earlier this week, and as US-Chiina tensions escalate, the outlook appears bleak.

"We remain circumspect about Latam's medium-term outlook," said Gustavo Rangel, chief economist, LATAM at ING.

"The impact of the recession and of the COVID-related fiscal relief over fiscal accounts is likely to be considerable. A strong fiscal tightening is necessary to return fiscal dynamics to a sustainable trajectory in 2021, which may create political friction later in the year."

Mexico's peso outperformed, up 0.3% ahead of a central bank rate meeting next week.

Data showed Mexico's annual inflation in July rose, but in line with expectations, keeping the central bank on track to cut the key interest rate to its lowest level in four years.

"All eyes will be on any hints about ... next steps beyond the likely rate cut," said Olivia Alvarez Mendez, an FX market analyst with Monex Europe.

In Argentina, stocks rose 2%. Argentina's $65 billion debt restructuring agreement will likely lead to credit upgrades, rating agencies told Reuters, while warning it is far from ensuring its longer-term economic future.

S&P Global Ratings said it will raise its sovereign credit ratings on Ecuador when the government issues new bonds this month under a debt restructuring. Ecuador won overwhelming investor support for a $17.4 billion foreign debt deal earlier this week.