EMERGING MARKETS-Mexico peso tumbles, stokes bets on rate hike ahead of Fed
(Recasts with bets on Mexican interest rate hike) By Michael O'Boyle MEXICO CITY, Feb 11 (Reuters) - A global selloff of riskier assets drove the Mexican peso to a record low on Thursday, spurring bets that the central bank of Latin America's No. 2 economy could hike interest rates ahead of the United States. Colombia's peso also hit its weakest level ever amid fears of a global economic slowdown. At the same time, Brazilian stocks fell sharply, hurt by concerns the government could increase spending that would add to a spike in inflation. Investors have been unwinding trades that sought to profit from high interest rates in emerging markets due to worries about lower crude prices and concerns weakness in world No. 2 economy China could have lasting effects on the global economy. Bets that financial turmoil will not derail the U.S. Federal Reserve's plan to increase rates later this year also weighed on sentiment. Oil prices sank to 12-year lows. Both Mexico and Colombia are major crude producers, but Mexico depends much less on oil exports as it ships mostly factory-made goods. Yields on short-term Mexican interest rate swaps shot higher as investors increased bets that the country's central bank could raise interest rates at its March 18 meeting. Swaps suggest an 80 percent chance that Mexico could hike by 25 basis points even as worries of a global slowdown have dampened bets the U.S. Federal Reserve will raise rates that same month. Last year, Central Bank Gov. Agustin Carstens said Mexico could even hike outside of its calendar if currency weakness began to threaten inflation expectations, but policymakers have not explicitly mentioned that possibility recently. The Mexican peso hit its weakest level since a 1993 revaluation, falling as much as 2.6 percent to 19.4480 per dollar, even as the central bank sold $400 million in two auctions. But the currency later pared losses, bouncing back to trade about 1.4 percent weaker on the day. It has lost around 6 percent since Feb. 4, on track to mark its worst six-day losing streak since late 2011. The Mexican peso has been one of the biggest victims of the global rout as many investors use the highly liquid currency to hedge against emerging market assets in general. "The problem with the peso is liquidity. Would an interest rate differential discourage the use of the peso as a hedge? I don't know," Siobhan Morden, an analyst at Nomura in New York. "But I think it is a bit drastic to hike rates, especially when all this uncertainty is the outcome of global growth concerns." The Mexican currency has shed more than 10 percent against the dollar so far this year, making it the second worst performer of the world's 36 most-traded currencies, next to the Argentine peso that has fallen by about 11 percent, according to Reuters data. Brazil's currency and stocks dropped, also hit by worries that the government could loosen fiscal policy to fight a deepening economic recession despite double-digit inflation. Latin American stock indexes and currencies at 1430 GMT: Stock indexes daily % YTD % Latest change change MSCI Emerging Markets 713.27 -2.37 -8 MSCI LatAm 1664.14 -2.92 -6.32 Brazil Bovespa 39318.30 -2.62 -9.30 Mexico IPC 42359.26 -0.41 -1.44 Chile IPSA 3650.88 -0.67 -0.80 Chile IGPA 17947.03 -0.63 -1.13 Argentina MerVal 11010.89 -2.96 -5.69 Colombia IGBC 8722.79 -0.1 2.05 Venezuela IBC 14594.52 0.08 0.04 Currencies daily % YTD % change change Latest Brazil real 4.0028 -0.52 -1.39 Mexico peso 19.1970 -1.36 -10.25 Chile peso 712.55 0.05 -0.40 Colombia peso 3439.49 -1.42 -7.86 Peru sol 3.5143 -0.23 -2.85 Argentina peso (interbank) 14.6300 -0.89 -11.26 Argentina peso (parallel) 14.45 -1.38 -1.25 (Reporting by Michael O'Boyle in Mexico City and Bruno Federowski in Sao Paulo; Editing by Chizu Nomiyama, Diane Craft)
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