Markets

Brazil's real surges on stimulus bets, while Mexican peso cools

  • Most Latam currencies gain.
  • Brazilian stocks rise on Santander results.
  • Brazil rate hike possible in Q1-economist.
Published February 3, 2021

Brazil's real extended gains into a third session on Wednesday as expectations of COVID-19 relief measures helped offset weak economic data, while Mexico's peso was flat after a series of steep gains this week.

The real added 0.5% to the dollar after the country's newly elected congressional leadership said they would seek ways to extend pandemic relief payments to impoverished citizens while respecting a constitutional spending cap.

Reports of the move, as well as President Jair Bolsonaro getting a stronger standing in Congress, had pushed up the currency this week. But it was still nursing steep losses from last month, and was trading negative for the year.

Brazil's central bank also warned that more fiscal spending could erode the country's fiscal credibility. Signs of increasing inflation in the country also pointed to pressure on the bank to hike interest rates.

"The (central) bank could be willing to front-load rate hikes in order to prevent the shocks spreading to other prices in the economy," economists at TS Lombard wrote in a note.

"The extension of the emergency aid would give the central bank even more arguments to hike as early as March: the additional fiscal stimulus could help offset the lower level of monetary stimulus while demanding a more cautious stance of the bank amid the rising fiscal risks."

Brazilian stocks rose in early trade after Banco Santander Brasil SA, one of the biggest banks in the country, beat fourth-quarter profit estimates. The stock rose more than 3%.

Mexico's peso was muted after rallying 2.4% over the past two days. The currency has been supported by a spike in silver prices and increasing optimism over bumper stimulus measures in the United States, which is a major trading partner.

Losses in the peso were somewhat mitigated by stronger oil prices.

Risk appetite has also improved this week, enabling large gains across emerging market assets on the rollout of global vaccine programs in the space, as well as expectations of more stimulus measures. But most of them are still trading negative for the year.

The currency of oil exporter Colombia rose 0.4% as oil prices neared a one-year high boosted by a draw in US crude and gasoline stocks, which fueled demand recovery hopes.

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