EMERGING MARKETS – Brazil’s real rallies as Lula’s side try to ease fiscal concerns

(Price updates) By Susan Mathew and Devik Jain, Nov 18 (Reuters) – The Brazilian real strengthened on Friday, outperforming its broader Latin American peers, as the new government sought to ease fears over the fiscal spending, while uncertainty about the pace of US Federal Reserve tightening kept the mood cautious. After a three-day losing streak, the Brazilian real rose 1%. Real mark their second consecutive week of losses due to concerns over budget spending when left-leaning President-elect Luiz Inacio Lula da Silva takes office on January 1. The currency was boosted by Vice President-elect Geraldo Alckmin, saying on Friday that the government would be fiscally responsible, promising a budget surplus and a reduction in public debt. On Thursday, the new government proposed guidelines for a constitutional amendment to exempt some 175 billion reais ($32.41 billion) from next year’s budget to pay for social programs. “The market had high expectations (President-elect Lula-the-pragmatist), who was crushed by reality (Lula-the-populist pushing for more spending),” said Natalia Gurushina, emerging markets fixed income economist at VanEck, in a footnote. “There is still room for a new outcome, if political uncertainty persists. The likelihood of a ‘warning shot’ from the Brazilian central bank (ending the pause and raising the policy rate) increases in this environment,” Gurushina wrote. Brazil’s central bank chief Roberto Campos Neto said on Friday the country was not off the hook on inflation and policymakers still saw work to do, signaling that fiscal deterioration could force a change in monetary policy. On Thursday, St. Louis Fed President James Bullard said interest rates may need to reach a range of 5% to 7% to be “tightly enough” to rein in inflation. This has seen merchants start setting a higher terminal rate, likely above 5%. The Mexican peso held steady against a steady dollar, while the Chilean peso hit a two-week low and was on course to snap a three-week winning streak. Preliminary data on Friday showed Mexico’s economy likely grew 5% in October from the same month a year earlier. But GDP data from Chile showed the economy contracted in the third quarter at the fastest quarterly pace in more than two years, as fears of recession grew at the world’s biggest copper producer. Meanwhile, Argentina is considering reinstating a special exchange rate for the soybean sector in a bid to boost exports, a government source told Reuters, as the country needs grain export dollars to replenish his reservations. Fitch Ratings affirmed Mexico’s long-term issuer default rating (IDR) in local currency and foreign currency at “BBB-“, with a stable rating outlook supported by a prudent macroeconomic policy framework, but limited by a moderate long-term growth. Latin American Stock Indices and Currencies by 2010 GMT: Stock Indices Latest Daily Centers Change MSCI Emerging Markets 942.87 0.05 MSCI LATAM 2167.49 0.61 Brazil Bovespa 109052.65 -0.59 Mexico CPI 51335.04 -0.05 COLUMICE CIRCULATION 1 Daily Change in % Brazilian real 5.3704 0.07 Mexican peso 19.4281 -0.11 Chilean peso 941 -2.20 Colombian peso 4984.25 0.20 Peruvian sol 3.8179 -0.37 Argentine peso (interbank) 163, 1700 -0.23 Argentine Peso (parallel) 302 1.66 Bengaluru; edited by Barbara Lewis and Grant McCool)