EMERGING MARKETS-LatAm assets choppy as investors weigh Fed's rate path

By Pranav Kashyap

Sept 18 (Reuters) - An index tracking Latin American currencies .MILA00000CUS edged higher in a choppy session on Thursday, as investors weighed what effects the Fed's softer stance would have on future rate moves.

Brazil's real BRL= came off its strongest level in more than a year, but was still 0.1% higher on the day. The Brazilian central bank left interest rates unchanged for a second straight meeting late on Wednesday, and signaled it was in no rush to ease.

Stocks in Sao Paulo .BVSP fell 0.18% as investors digested the central bank's message that dashed hopes for rate cuts later this year despite cooling inflation and slowing growth under borrowing costs near two-decade highs.

With rates locked at 15%, the real has already rallied about 17% this year, powered by an aggressive tightening cycle that ended in July. Policymakers, though, kept the door open for more hikes if needed.

"The roughly unchanged communications were more hawkish than we were expecting, reinforcing our call that the potential interest rate cutting cycle is unlikely to materialize this year," Citigroup analysts said.

Latin American stocks .MILA00000PUS lost steam as a regional equities gauge fell 0.4%, coming off its highest level in more than one year. The muted reaction came after the U.S. Federal Reserve trimmed rates by 25 basis points — a move laced with caution. Chair Jerome Powell framed the cut as a risk-management step rather than the kickoff to a full-blown easing cycle, leaving investors uncertain and hoping for a more dovish tilt.

Most currencies initially had a stronger showing, but the dollar regained ground up 0.6%, adding downward pressure.

A gauge tracking Latin American currencies .MILA00000CUS struggled for direction and was last up 0.1%, led by the real's gains. With Brazil holding rates steady and the Fed easing, the widening yield differential between the two economies is setting the stage for carry trades and capital inflows into Brazil's higher-yielding assets — a dynamic that could continue to bolster the real.

South Africa's central bank, like Brazil, stood pat on interest rates, holding borrowing costs at 7%. The rand ZAR= touched a more than one-week high and was last up 0.1%.

"With (South Africa's) growth still sluggish, inflation weak and inflation expectations coming down, it won’t be long before the easing cycle resumes," Jason Tuvey, deputy chief EM economist at Capital Economics, said.

The Argentine peso ARS=RASL hovered near record lows as the central bank scrambled to shore up the currency, selling $53 million from its international reserves after the peso slipped below its trading band floor on Wednesday.

President Javier Milei's popularity took a hit in recent provincial elections, where opposition Peronists scored a decisive win. The result triggered a sharp selloff in Argentine assets and cast fresh doubts on the staying power of Milei's libertarian experiment.

Chilean markets were closed for a public holiday. Presidential election kicked into high gear on Wednesday, with leading campaigns officially launched ahead of a November 16 contest which may signal a shift to the right for the mining powerhouse.

Key Latin American stock indexes and currencies: