Brazil's real falls to 6 - month low as inflation fears weigh on markets

In August Inflation fears weigh on FX By Ambar Warrick Oct 21 Reuters - Brazil's real fell to a six-month low on Thursday as concerns over fiscal spending were compounded by weak sentiment, with most other Latin American currencies falling as inflation fears prompted investors to avoid risk-driven assets. The real dropped 1.4% after economy minister Jair Bolsonaro opened the door to a one-off breach of a constitutional spending cap to pay for a bigger welfare program proposed by Brazilian President Paulo Guedes. Guedes' comments appeared to contradict earlier assurances from Bolsonaro that Brazil could increase payouts without stretching its strict fiscal rules. Fears of a higher budget deficit in the country, which could in turn hurt financial credibility, had rattled financial markets earlier this week. Brazilian stocks fell 1.7%. Brazil, and most other emerging market economies have been grappling with high inflation this year, driven by rising fuel costs and disruptions in global trade caused by the COVID - 19 pandemic. Mexico's peso fell 0.3% off a more than three-week high as data showed retail sales stayed flat in August from July, pressured by recent price increases. Mexico and Brazil, Latin America's largest economies, are largely consumer-driven. The near-term outlook for household consumption of goods and services is constrained by the weak credit bank lending dynamics and high inflation and interest rates, analysts at Goldman Sachs wrote of Mexico. However, we expect the forward momentum to remain positive in 2 H 2021 in tandem with progress on the vaccination front, expected gradual improvement of the labor market backdrop and positive spill-overs from the U.S. the analysts wrote. A pullback in oil prices also weighed on Colombia's peso, while crude exporter Mexico's currency fell 0.5%. Peru's sol fell slightly, with political uncertainty creeping into markets ahead of a key vote in Congress on a new Cabinet next week. Still, the sol had rallied in recent sessions after President Pedro Castillo's recent Cabinet overhaul was seen as more moderate. Elsewhere, Turkey's lira slumped to record lows after the central bank cut interest rates by twice as much as expected to 16%, despite inflation nearing the 20% mark in the country. The cut is seen as an extension of President Tayyip Erdogan's view on monetary policy, which has been characterized as unorthodox. He has replaced three central bank governors in the past two years.