Latam FX firm; Pemex move puts Mexico's credit rating in focus

Most Latin American currencies joined broader emerging market peers in the black on Friday, looking to end a week dominated by monetary policy surprises on a high note.

Mexico's peso rose 0.4% to stay near one-month highs and was on course to end the week up about 2%, while Chile's peso rose 0.3%. Declining oil prices saw Colombia's peso underperform, down 0.2%.

Emerging market (EM) currencies got a boost this week from the US Federal Reserve maintaining its dovish stance, leaving interest rates rate near zero. Low rates in the United States bode well for high yielding currencies as the interest rate differential makes them more appealing for carry trades.

With inflationary pressures driving bumper rate hikes in Brazil and Turkey and a surprise increase by Russia, the EM currencies index was on track to break a four-week losing streak.

Brazil's real extended gains to a third straight session, leaving it up around half a percent since last Friday.

But with COVID-19 cases still surging in Latin America, economic fundamentals still reeling from the pandemic, and political worries persisting, Latam assets have lagged EM peers.

On Thursday, Mexican state-oil firm Pemex's chief executive said the government had agreed to absorb regular debt payments this year for Latam's most indebted company.

With $113.2 billion in debt as of 2020, Pemex's burden on Mexico has seen credit rating downgrades by top agencies.

"This announcement shows that the strategy of the government will continue to be to support Pemex in gradual steps, without a significant change in its business plans, putting increased pressure on sovereign finances," said Citi Research strategists.

"This means a continued worsening credit outlook for the sovereign and the need to find additional resources, most likely through a fiscal reform to be presented in September, together with the 2022 budget."

Among stocks, state-controlled Brazilian lender Banco do Brasil fell up to 0.8%, after its chief executive submitted his resignation on Thursday after months of pressure for his ouster from President Jair Bolsonaro.

Planemaker Embraer rose more than 2% after reporting its best quarter so far during the COVID-19 pandemic.

On the week, Brazil's benchmark Bovespa index was set to end a seven-week winning streak - its longest in eight years, down more than 3%.