LatAm currencies rally on Fed cut; Brazil's real leads gains

Chilean coins of 100 pesos are seen next to banknotes of 1000, 5000, 10,000 and 20,000 pesos in this picture illustration, August 16, 2016. REUTERS/Rodrigo Garrido/Illustration

By Niket Nishant

Dec 11 (Reuters) - Latin American currencies climbed on Thursday and were on track for their strongest session in nearly two months as the dollar weakened following an interest rate cut by the Federal Reserve.

Higher-yielding currencies in the emerging markets often benefit when the Fed cuts rates, as investors seek alternative destinations to park capital.

The MSCI index for Latin American currencies rose 0.8% while the stocks gauge edged 0.6% higher.

Brazil's real led the gains after its central bank left interest rates at a near two-decade high on Wednesday and stuck to its hawkish tone. It was last up 0.8% against the dollar.

The Chilean peso also firmed 0.7%, extending its strong run in the week leading up to the presidential run-off on Sunday where far-right candidate Jose Antonio Kast is expected to win.

POLITICS, DATA TEMPER RISK IN BRAZIL

Sentiment toward equities in some of the region's major economies remained weak. For global investors, the combination of currencies' strength and patchy stock performance could sharpen the focus on country-specific stories and drive more selective positioning across the region in the months ahead.

Brazil's Bovespa index fell 0.2%, resuming its slide after stabilizing a day earlier. Data on Thursday showed retail sales volumes unexpectedly rose in October, which could further dampen hopes for a rate cut.

The data comes at a sensitive time for Brazil, where political uncertainty is back in focus.

Stocks have traded in a tight range this week after Senator Flavio Bolsonaro, the eldest son of former President Jair Bolsonaro, confirmed his intention to run for president next year, dashing hopes for a more market-friendly contender such as Sao Paulo Governor Tarcisio de Freitas.

"Political volatility is a reason not to have as large a trade in Brazil as you might normally want, but the macroeconomic story is still very favorable," said David Hauner, head of global emerging markets fixed income strategy at BofA Global Research.

"Brazil is the one big emerging market that has a fiscal issue. And a favorable election scenario is one where you get an administration that is going to be focusing on some fiscal consolidation."

Separately, Mexican equities rose 0.9%. The Senate on Wednesday approved tariff hikes of up to 50% on imports from China and several other Asian countries, aiming to bolster local industry despite opposition from business groups.

Argentina's dollar-denominated bonds were also trading higher, a day after the government raised $1 billion through a bond sale as it prepares for an eventual return to international capital markets.

Key Latin American stock indexes and currencies:

Equities Latest Daily %

change

MSCI Emerging Markets 1377.1 -0.39

MSCI LatAm 2695.42 0.57

Brazil Bovespa 158688.02 -0.24

Mexico IPC 63980.63 0.9

Chile IPSA 10195.64 0.25

Argentina Merval 3008637.43 -0.166

Colombia COLCAP 2121.32 0.08

Currencies Latest Daily %

change