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Brazil will report its February nominal and primary budget balances today. While this report typically does not move the Brazilian market, the risk is that it does today and in disappointment. Late yesterday, it was reported that the central government balance deteriorated to a BRL1.09 bln deficit compared with expectations for a BRL1.23 bln surplus. In its updated economic forecasts, the government is forecasting CPI this year at 4.9% and 4.5% next year. The central bank updated its forecasts toward and have inflation at 5.2% this year and 4.9% next year. The midpoint of the central bank target is 4.5%.

The fact that inflation is forecast at such elevated levels may warn that tightening of monetary policy may be more aggressive than previously thought. Already there seems to be an increase in forecasts for the central bank to hike rates 75 bp at its next policy meeting (April 27-28). And such expectations have been underscored by the central bank's assessment of a "steep" reduction in the output gap. Separately, S&P reaffirmed the country's BBB- foreign currency debt rating--though did appear to hold out the possibility of an upgrade if growth is "stable and sustained."

The combination of this news stream, coupled with the pullback in the US, is helping push BRL to its best levels in a week today. Tomorrow is the beginning of the new fiscal year in Japan and it would not be surprising to see renewed interest in Brazilian fixed income products by Japanese investors. The dollar is vulnerable to further BRL strength. Potential extends to BRL1.75 in the coming week or so.

Although there is much talk of Meirelles stepping down to re-enter politics, President Lula has asked him to say on. Meirelles is expected to announce his decision today. Regardless of what he decides, the central bank is about to begin a new tightening cycle. That will also make it somewhat less anxious about BRL strength.

Mexico is featured in a FT story that plays up the country's positive aspects. The government recognizes this and has revised GDP up a few times already this year to 3.9% and has hinted that it may be hiked again in the coming weeks. The Bolsa, which is up only 4% for the year, reached a new record high yesterday before slipping into the close.

For its part, the dollar recorded a new 17 month low against the peso yesterday. Although we have tended to be skeptical about the underlying strength of the peso,(concerned about the decline in oil output, the lack of much progress on broadening the tax base, and the ongoing security issues), the market is clearly more friendly toward the peso. The Commitment of Traders at the IMM should net long spec positions are over 100k and look poised to test the record high seen in February 08 near 125k contracts.

Meanwhile, a number of contacts have begun suggesting dollar potential toward MXN12.00-10, which represents about another 2% dollar decline. More immediately, look for resistance in the MXN9.38-MXN9.42 area to contain upticks.

Disclosure: No positions

Source: Moves in Brazil, Mexico