Latam FX gains on commodity strength, benign US inflation

Chile's peso rose on Wednesday as copper prices hit an eight-year high, with broader Latin American and emerging market currencies gaining as the dollar dipped on signs that underlying US inflation remained benign.

US consumer prices rose moderately in January as the pandemic continued to weigh on the labor market and the services industry. The reading raised expectations that the Federal Reserve would be in no hurry to tighten policy in the near-future, given the economy was still reeling from the pandemic.

This in turn pushed up sentiment, inviting plays into risk-driven assets across emerging markets.

The dollar dropped after the data, while US yields - a rise in which had recently pressured EM markets - also dipped.

"For right now, the Federal Reserve isn't worried about inflation and wants the economy to first reach full employment before taking any action to combat inflation... it's not a great policy for investors who rely on fixed income or risk averse investors who don't want to invest in stocks," said Nancy Davis, founder of Quadratic Capital Management.

Chile's peso rose 1.1% to an over one-week high, extending gains into a third session as copper prices surged on expectations that large stimulus measures and accommodative policies would elevate industrial demand for the metal.

Oil exporter Colombia's peso rose 0.8% tracking higher oil prices, while broader emerging market currencies shrugged off initial losses to trade positive.

Latin American stocks continued to lag their broader emerging market peers, the latter of which hit a record high.

Assets in Asia and Europe have outpaced their Latin American peers, as high regional infections and concerns over fiscal health kept investors at bay.

The real lagged its peers as retail sales slumped a far more-than-expected 6.1% in December, underlining the drastic impact a second wave of infections had on the economy.

Brazil is among the worst hit countries by the pandemic, and has been struggling to rein in infections and roll out vaccines. The government recently confirmed it was considering more stimulus measures to offset the pandemic's economic ructions.

But these measures could possibly overstretch fiscal spending in the country and push up risk premiums on Brazil's debt and currency, forcing the central bank to tighten policy sooner or by more than planned, the bank's chief warned.