EMERGING MARKETS-Brazil real drops 2.2% on rate-cut bets; LatAm FX falls on strong dollar

By Ambar Warrick and Susan Mathew

Aug 3 (Reuters) - Brazil's real sank 2.2% on Monday as markets factored in an interest rate cut expected by the central bank, while a strong dollar and surging coronavirus cases in Latin America pressured other currencies in the region.

Most currencies retreated after strong gains in July, where hopes of a COVID-19 vaccine and better commodity prices had supported buying.

Brazil's central bank is expected to cut rates further into record-low territory on Wednesday as it continues to try and mitigate the impact of the COVID-19 pandemic.

Gustavo Rangel, chief economist, LATAM at ING pointed to two factors that may tip the balance in favor of keeping the door open to additional rate cuts: recent lower-than-expected inflation, and the fact that the real BRBY has consolidated a stronger trading range when compared to the lows seen in April-May.

"Such an outcome would, necessarily, help keep FX volatility high and maintain an underperforming bias for the BRL."

Data on Monday showed manufacturing activity in Latam's largest economy expanded at a record pace in July, while separate data showed Brazil posted a record $8.1 billion trade surplus as the pandemic led to another steep fall in imports.

The Institute of International Finance said emerging market stocks and bonds saw foreign net inflows for a second consecutive month in July, but the outlook remains uncertain.

With Latam nearing the 5 million COVID-19 cases mark, investors are cautious about fresh lockdowns to contain the virus' spread. Brazil is the second-worst hit country in the world, behind the United States.

Mexico's peso MXN= fell 1.8%, while Colombia's peso COP= hit a five week low against the dollar which surged after upbeat manufacturing sector numbers from around the globe. FRX/MKTS/GLOB

Chile's peso CLP= weakened in tandem with the prices of copper, the country's largest export. Data showed that Chile's economic activity fell 12.4% in June from the same month a year ago, but contracted less than expected. MET/L

Among stocks, Mexico's Ipc index .MXX looked to post its best day in six weeks led by conglomerate Alfa's ALFAA.MX 25.3% jump after it announced plans to spin-off its remaining 75% stake in auto parts business Nemak NEMAKA.MX.

Most other regional bourses gained, as possible multibillion-dollar deals and efforts to work-out a crucial U.S. stimulus plan lifted Wall Street. .N

Argentina's peso ARS= fell and bonds dipped almost 1% as the government weighed extending its $65 billion debt negotiations, which have hit a roadblock ahead of an Aug. 4 deadline after creditors rejected the country's "final" offer and rallied behind a counterproposal.

Key Latin American stock indexes and currencies 1930 GMT:

Stock indexes

Latest

Daily % change

MSCI Emerging Markets .MSCIEF

1077.84

-0.1

MSCI LatAm .MILA00000PUS

2028.48

-1.86

Brazil Bovespa .BVSP

102851.05

-0.06

Mexico IPC .MXX

37711.97

1.87

Chile IPSA .SPIPSA

3974.47

-1.06

Argentina MerVal .MERV

53576.37

8.777

Colombia COLCAP .COLCAP

1140.30

0.53

Currencies

Latest

Daily % change

Brazil real BRBY

5.3312

-2.17

Mexico peso MXN=D2

22.6733

-1.77

Chile peso CLP=CL

760.1

-0.51

Colombia peso COP=

3767

-0.95

Peru sol PEN=PE

3.5407

-0.25

Argentina peso (interbank) ARS=RASL

72.5100

-0.26

(Reporting by Ambar Warrick in Bengaluru; editing by Jonathan Oatis and David Gregorio)

((Ambar.Warrick@thomsonreuters.com; +91-80-6182-2837; Reuters Messaging: ambar.warrick.thomsonreuters.com@reuters.net; Twitter: @AmbarWarrick))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

World Markets