Brazil's real gains after cenbank resumes rate hikes; other currencies steady

Brazil's real outpaced its regional peers on Thursday after the central bank kicked off an interest rate-hiking cycle and signaled more increases, while key indexes for Latin American assets climbed after an outsized U.S. rate cut overnight.

The real USDBRL hit a one-month intraday high, strengthening 0.7% against the dollar, following an expected 25-basis-point rate hike and as the central bank hinted at upcoming rises to tackle a challenging inflation outlook driven by stronger-than-expected economic activity.

The rise in the benchmark Selic interest rate for the first time in over two years also comes in the face of the Federal Reserve's larger-than-usual 50-bps cut in U.S. interest rates and projections of another half-a-percentage-point cut by year-end.

"Many market participants anticipated this move, but some believe it could be more symbolic, helping to boost confidence in the BCB's (Banco Central do Brasil's) commitment to inflation control," said Albie Manderson, FX risk manager at Deaglo.

This widens the interest rate differential between Brazil and the U.S., likely supporting the real by attracting capital inflows and easing inflationary pressures through lower import prices.

"The widening interest rate differential adds further complexity to the BCB's decision-making process. However, this move could help temper pressures on the Brazilian real."

The real's gains helped the MSCI gauge tracking Latam currencies (.MILA00000CUS) to gain 0.3%, with the Colombian peso USDCOP also rising 0.2%, while Peru's sol USDPEN held steady at 3.7333 per dollar.

"Depreciation of the greenback would be beneficial for many emerging markets that carry significant levels of dollar-denominated debt, such as Turkey and Argentina," economists at the Institute of International Finance wrote in a report led by Chief Economist Marcello Estevão.

On the data front, a preliminary estimate showed Mexico's economy likely expanded 1.1% in August compared with the same month a year earlier. The Mexican peso USDMXN held firm at 19.305 per greenback.

The MSCI Latam stocks index (.MILA00000PUS) was up 0.3%, rising for the seventh straight session, led by strong gains in Argentine stocks <.MERV>, which was headed for an all-time high close.

Argentina posted an eighth consecutive primary fiscal surplus in August, as the government pursues stringent austerity measures to tackle an economic crisis.

Elsewhere in emerging markets, South Africa took a measured tone after its first rate cut in more than four years, while Turkey held its main interest rate steady at 50% for a sixth straight month.

The Turkish lira USDTRY was last up 0.2%, while South Africa's rand USDZAR held firm at 17.53 per greenback.

Angola left its main interest rate unchanged at 19.50% after inflation started easing last month, while Ukraine kept its key rate unchanged at 13% for the second consecutive time.

Markets in Chile were shut for a public holiday.

Key Latin American stock indexes and currencies: