Brazil Real Falls Before Central Bank Meeting: Latin Currencies

Rio de Janeiro, May 19 (<a href=quote.bloomberg.com>Bloomberg) -- Latin American currencies declined, led by Brazil's real on investors' expectations the government will cut interest rates, easing its fight against inflation and causing the trade surplus to shrink.

The real slid 1.9 percent to 2.9975 per dollar at 3:36 p.m. New York time, headed for a two-week closing low. The real has declined 4.2 percent since May 12, the sixth-worst decline of 59 currencies tracked by Bloomberg. In 2003, it is up 18 percent, the best performance in that time. Argentina's peso declined.

Pressure on the government to cut the benchmark interest rate from 26.5 percent is mounting both inside and out of the government and was attacked in a front-page editorial yesterday in the Folha de S. Paulo, Brazil's largest-circulation daily.

The market is beginning to slowly realize this government sees the current set of policies as somehow temporary,'' said Tony Volpon, an economist with New York based Dinosaur Securities. A shift to a growth promoting policy, independent of pension and tax reforms in Congress will lead to a weaker real.''

Central bank President Henrique Meirelles has said interest rates will not fall unless inflation, now at its highest 12-month rate since 1995, also declines. Lula's coalition, though, faces a revolt from party members opposed cutting government pension spending and the system's deficit from 5.5 percent of Brazil's gross domestic product by increasing workers' contributions.

The real pared declines after O Globo newspaper's online news service reported Anne Krueger, the International Monetary Fund's deputy managing director, said Brazil needn't act in the currency market to stop the dollar from declining more quickly.

Investor speculation that the country's central bank might take steps to bolster the dollar and safeguard export growth had contributed to the real's slide from May 12's 11-month high.

Market Rates, Debt

While 13 of 15 economists polled by Bloomberg expect the government to keep rates steady this week, interest rates fell in the futures market for contracts maturing in July or later.

The overnight interest-rate futures contract for January settlement, the most-traded on Sao Paulo's BM&F Exchange, fell 17 basis points to 23.66 percent from 23.83 percent on May 16. The contract indicates investor expectations for the end of December. A basis point is 0.01 percentage point.

Brazil's benchmark 8 percent bond maturing in 2014 fell 2.00 cents to 86.38 cents on the dollar from 88.38 on May 16 and a record high 91.75 on May 13, according to J.P. Morgan Chase & Co. The yield rose to 11.45 percent.

Merrill Lynch & Co., the biggest securities company by capital, today in a note to investors by Tulio Vera, head of emerging market fixed-income research, raised its recommendation on Brazil debt to overweight, so as ``to better capture the next leg of this run up.''

Argentina

Argentina's currency fell for a fourth day after President- elect Nestor Kirchner said he wants to see it weaken to 3 per U.S. dollar to make the country's exports more attractive and spark economic growth.

The peso fell 0.9 percent to 2.9150 per dollar and has dropped 4.7 percent since May 14, when former President Carlos Menem pulled out of the election, giving Kirchner the win.

``It's less appealing to put your funds there with this noisy political background,'' said Guillermo Estebanez, a currency strategist at Banc of America Securities Inc. in San Francisco.

The Argentine peso had gained 16 percent against the dollar in 2003 before today, making the country's exports less competitive overseas, arousing investor concern a strong peso might choke off a nascent economic recovery. Additionally, Argentina's new government will spend 8 billion pesos this year on public works projects, such as paving roads and building homes, to try and spark economic growth, Vice President-elect Daniel Scioli said in an interview. The country hasn't begun talks with bondholders on $95 billion in defaulted debt.

``Kirchner is basically saying he will take away from the fiscal numbers whatever amount could be used to pay creditors,'' Estebanez said.

Mexico

The Mexican peso fell for the third day in four as declining global stock indexes and local interest rates prompted traders to sell pesos.

The peso fell 5.35 centavos, or 0.5 percent, to 10.3535 per dollar from 10.3 per dollar at the close May 16. The peso fell to a record low of 11.2644 on March 6 and last week rose to 10.0985.

U.S. and Mexican stocks declined on concern slow global economic growth will choke off demand for Mexico's exports and capital inflows into Latin America's largest economy. Comments by U.S. Treasury Secretary John Snow this weekend that suggested the U.S. is content with the 22 percent slide in the dollar this year also weighed on the peso.

The peso is getting weaker because markets don't know to interpret'' Snow's comments, calling the dollar's recent losses fairly modest,'' said Jose Maria de la Torre, head of fixed- income research at ING Bank Mexico SA. ``The losses in stocks point to further weakness in the U.S. economy.''

Rates on Mexico's benchmark 28-day Treasury bill dropped to a historic low of 4.9 percent in the May 13 weekly auction of government debt, reducing investor sentiment to hold peso- denominated assets.

Colombia

Colombia's currency fell for the third day in four after the Prosecutor General Edgardo Maya said a government plan to cut spending through a referendum was largely unconstitutional.

The peso fell 1.3 percent to 2,885 per dollar from May 16, when its plunged 1.5 percent after the central bank called off its June dollar call options auction, traders said.

``This is partly due to what the prosecutor general said and also because of the suspension of dollar options sales for June,'' said Juan Pablo Barney, a peso trader with Banco de Credito de Colombia SA.

Maya, who monitors government agencies, said 14 of 19 questions proposed in a government-backed referendum, including one to freeze some government spending for two years, were unconstitutional.

Ratings

The Constitutional Court, which is studying the referendum's constitutionality, is set to issue a ruling in late September. Ratings agencies such as Standard & Poor's are closely monitoring the progress of the proposed referendum.

Colombia has a Ba2 rating from Moody's Investors Service and BB from Standard & Poor's, both two levels below investment grade.

The country's peso-denominated bonds paced declines by the currency. The benchmark 15 percent coupon peso-denominated bond due in January 2012 fell 2.27 to 95.9, pushing its yield up to 15.84 percent.

The country's 10 percent dollar-bond that matures in January 2012 fell for a fifth day, losing 2.25 cent on the dollar to 108.5, down from a high of 115.25 last week after Merrill Lynch downgraded Colombian debt to marketweight from overweight.

Chile's peso fell for the fourth day in five, declining 1.3 percent to 714.35 per dollar from 705.05 on May 16. Peru's new sol weakened 0.4 percent to 3.4895 per dollar from 3.4759 on May 16. Uruguay's peso weakened for the first day in three, losing 1 percent to 29.4500 per dollar from 29.3 on May 16. Venezuela fixed its bolivar at 1,598 per dollar this year. Last Updated: May 19, 2003 15:36 EDT