Brazil, Chile currencies surge after Fed

The Brazilian real and Chilean peso surged on Thursday after the announcement of a huge U.S. monetary stimulus package, putting pressure on both Latin American countries to curb the strength of their own currencies.

The real rallied over 1 percent and the peso leapt over 2 percent against the U.S. dollar, which plummeted after the U.S. Federal Reserve unveiled a $600 billion plan on Wednesday to revive the struggling U.S. economy.

Chile’s central bank announced measures to ease dollar outflows on Thursday, while Brazil’s finance minister said Brazil would protest the Fed’s decision at the upcoming G20 meeting.

Several Latin American countries have introduced a slew of measures to slow a multi-month rally in their currencies, which is hurting local exporters’ competitiveness and threatening growth.

The Brazilian real bid 1.13 percent stronger at 1.681 reais per U.S. dollar on the local spot market — its strongest level in two weeks.

“If Brazil’s central bank wants to maintain the real around 1.70 per dollar, it will have to be even more aggressive with its dollar purchases,” said Miriam Tavares, currency director at brokerage AGK Corretora in Sao Paulo.

“Furthermore, the market will begin speculating again about new measures to contain a sharper appreciation of the real.”

Brazil introduced tax increases last month in an effort to curb a rally in the real, which is beginning to have a damaging effect on the real economy.

Data released on Thursday showed that Brazil’s industrial production continued to slow — a trend some analysts attribute to the stronger currency.

The Chilean peso surged 2 percent to 479.40 per dollar and was heading for its biggest daily percentage gain in more than a year.

The currency largely held on to its gains after Chile’s central bank said on Thursday it would raise foreign investment limits for pension funds to 80 percent from 60 percent in an effort to encourage outflows.

MEXICAN PESO SET TO OUTPERFORM?
The Mexican currency lagged the region’s main currencies in early trading, strengthening only 0.27 percent to 12.2244 per dollar.

It was boosted in late trading in the previous session when the currency markets of Chile and Brazil had already closed, leaving the peso less room for appreciation on Thursday.

The peso was also shaken slightly by data showing new U.S. claims for unemployment benefits rose more than expected last week.

Mexico is more susceptible to changes in the outlook for the U.S. economy due to the countries’ strong trade links.

But analysts have begun to recommend the Mexican peso as one of the only currencies in the region that is not currently at risk from government intervention.

“We have liked the Mexican peso for some time,” said analysts at HSBC in a research note. Demand for the country’s bonds and cheap valuations have made the currency an attractive buy, they said.

“The other factor now playing in Mexico’s favor is its free and open market. No intervention and no capital controls. This isn’t new, but in the context of what other countries are doing, it sets Mexico apart.”