Latam Currencies Poised To Benefit

Ideas that China will allow greater flexibility in the yuan, which for many means appreciation, will have positive impact on Latam currencies. The Mexican peso and Brazilian real are leading the advance with about 0.66% gain today. Chile is next with about a 0.33% rise.

The risk is that market's euphoric reaction in Asia and Europe is not followed through. This is evident already not just in the euro, which has now briefly traded below Friday's low, but also in copper prices. The Sept contract rallied to $305, but has subsequently backed up. A break of support near $300 could be an early warning sign of increased risk of profit-taking on these Latam currencies.

The US dollar see initial support near MXN12.40. Initial resistance is pegged at MXN12.50. A break signal the direction of the next 1% move.

The dollar tested the BRL1.75 support area. Resistance now is seen near BRL1.7750. The latest central bank poll found inflation expectations on the 12-month view crept up to 4.83% from 4.76% previously. But the year end rates was unchanged at 5.61% and the 2011 expectation was also unchanged at 4.8%. Both of these readings are above the central bank's target of 4.5%. Meanwhile, GDP forecasts were lifted as well--now 7.06% from 6.3% 5 weeks ago. This underscores the likelihood of a 75 bp rate hike at the next month's central bank meeting, which would be the third consecutive move of that magnitude.