Latam FX set for best week this year as real nears four-month high

Latin American currencies gained on Friday and were set for large weekly gains as weak payrolls data pushed the dollar to a more-than two-month low, while Brazil's real jumped to a near four-month high after retail sales fell less than expected.

MSCI's index of Latin American currencies rose 0.9% to a near four-month high and was set for its best week since November, while stocks firmed 1.5%.

Brazil's real rose 0.7% after retail sales volumes fell 0.6% in March from February, far less than the 7.0% decline forecast by a Reuters poll of economists.

The real was set for its best week this year after the Brazilian central bank hiked rates on Wednesday, and flagged more strong hikes to help curb rising inflation.

"The BCB continues to see the rate hike cycle only as a 'partial normalisation' of interest rate levels but keeps the door open for a revaluation at a later stage," said Alexandra Bechtel, an analyst at Commerzbank in a note.

"We therefore stick to our rate view (Selic at 5.25% at year-end 2021) even if the Brazilian central bank is likely to be a little more courageous now than previously expected."

Latam currencies were set for a sixth straight week of gains, tracking a broader trend in emerging markets as improving risk appetite saw traders favoring high-yield, risk-driven assets. The risk-on sentiment has been underpinned by a weaker dollar and Treasury yields.

The dollar index fell 0.4% to a more-than two-month low after payrolls data showed US job growth unexpectedly slowed in April.

The Mexican peso gained 0.7% and was set to end the week higher, tracking a jump in oil prices. Annual inflation picked up faster than expected in April to its highest level in more than three years, moving well above the central bank's target level, data showed.

The currency of the world's top copper producer Chile gained 0.7% as copper prices surged to record highs, while a trade surplus of $2.040 billion in April further helped sentiment.

However, gains were limited as Chile's lower house of Congress approved on Thursday an opposition-led bill that would slap a progressive royalty on sales of copper as prices rise, sharply hiking taxes on the sprawling industry to pay for social programs during the COVID-19 pandemic.

Among other Latin American currencies, the Colombian peso gained 0.8% but was the only Latin American currency set to drop for the week along with the Argentine peso.