Mexico's peso slumped on Friday on surprisingly weak US growth data, while Brazil's real rebounded after tumbling this week on new capital controls and there threat of more intervention Data showed the US economy came perilously close to flat-lining in the first quarter and grew at a meager 1.3 percent annual rate in the April-June period, with anemic consumer spending hurting the outlook for Mexican exports.
Compounding the bad data was a lack of progress in Washington to raise the US debt limit and avert an unprecedented debt default by the United States after August 2. But the peso recovered after nearing the 11.80 level, showing there were still peso buyers hoping a last minute deal in the United States will help riskier assets bounce back.
"I think people are still holding out for something to get done this weekend," said Enrique Tejon, head of currency trading at Banorte-IXE in Mexico City. "People really have not figured out what happens if they don't raise the debt limit, but it will be a strong reaction either way."
Mexico's peso shed 0.36 percent to 11.7601 per dollar. The cost of dollars in pesos rose above its 200-day simple moving average and a close past that level could bode for steeper peso losses next week. Brazil's real surged 0.69 to bid 1.5567 per dollar, tracking gains in the euro as the dollar weakened after the poor US growth data and lack of a debt deal.
But concerns also resurfaced this week that Europe's debt crisis may spread to Italy and Spain. The market could start selling the euro if the US manages to come up with a solution to its debt crisis and that could weigh on demand for emerging market currencies. "Today is a very hard day, I do not know if I buy the US dollar due to the problems of Europe, or I sell due to the US debt ceiling," said Moacir Marcos Junior, a trader at Interbolsa.
The real had shed about 1.8 percent in the last two sessions after the government surprised the market with a new tax on derivatives that could eventually be raised as high as 25 percent, knocking the real off a 12-year high. Traders said the new rules spurred widespread caution in the market as banks and investors sorted through the implications. But analysts doubted the measures will do much more than slow the real's advance over the medium term.
Brazil has used a series of measures since last year to fight the real's gains, which are hurting domestic industries. The interventions have spurred short-term losses, but investors end up finding new ways to milk Brazil's double-digit interest rates, and they have eventually pushed the real to higher highs after each new measure. Still, traders may be cautious about soon driving the real past the 1.55 level again. The break of that level early this week seemed to trigger the latest new rules.