Latam FX dips before Fed, Colombian peso recovers from steep drop

Dec 15 (Reuters) – Latin American currencies fell on Wednesday ahead of a Federal Reserve meeting that is expected to shed light on the bank’s plan for tapering policy, while Colombia’s peso was steady after its worst day in 21 months.

MSCI’s index of Latin American (Latam) currencies (.MILA00000CUS) fell 0.5% as investors feared a more-hawkish-than-anticipated stance from the Fed, which is under pressure to contain rising U.S. inflation.

Colombia’s peso rose 0.4% after tumbling nearly 3% on Tuesday, as a 10% raise in the minimum wage by the government fed concerns over rising inflation and stretched fiscal spending.

Broader Latam and emerging market currencies retreated, while the dollar rose as investors broadly expected the Fed to at least outline plans to taper stimulus, if not indicate when they intend to hike interest rates.

“At this stage rapid tapering would constitute a stronger signal as it would be sent out at a time when the new corona variant causes renewed economic concerns,” Ulrich Leuchtmann, head of FX and Commodity Research at Commerzbank, wrote in a note.

“If the Fed nonetheless does everything today to be prepared for rate hikes as quickly as possible this illustrates that its fear of self-accelerating inflation is considerable … that in turn opens up the prospect of higher U.S. yields medium-term, which constitutes a USD-positive argument.”

Chile’s peso led early losses in Latam, falling 0.6% as the prices of copper — its top export — fell on concerns over Chinese demand.

The Chilean central bank had hiked rates as expected to 4% on Tuesday, and raised its 2021 GDP forecast on the back of a strong post-COVID economic bounce.

But the bank also raised its inflation forecast for the year, and flagged more rate hikes to combat runaway prices. read more

In addition, political uncertainty is high in the country, ahead of a highly polarized presidential election runoff on Sunday. read more

Brazil’s real fell 0.2%. Data showed economic activity fell in October, marking a weak start to the fourth quarter as rising inflation saw the economy unexpectedly shrink in the prior quarter. read more

Peru’s sol was flat as the focus remained on government and private negotiations with communities blockading several major mines across the country. read more

Key Latin American stock indexes and currencies:

Reporting by Ambar Warrick; editing by Jonathan Oatis