EMERGING MARKETS-Brazil's real rallies 1% on cenbank support, fiscal reassurances

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* Mexican economy expands 5% in September * Brazil's real to weaken further, economist says * Vale drops on downbeat outlook * America Movil, Aeromexico drop after Q3 results (Updates prices) By Shashank Nayar and Susan Mathew Oct 20 (Reuters) - Brazil's real jumped 1% higher on Wednesday amid central bank intervention and fiscal reassurances, while Mexico's peso hit three-week highs after data showed its economy continued to recover from a COVID-19 pandemic slump. After declining initially on political and fiscal worries, Brazil's real rose as President Jair Bolsonaro said a new welfare program that he approved would not breach the government's spending limit, but failed to give details on how that would be achieved. Attempts by the central bank to support the currency hovering at six-month lows also helped. The bank sold all 10,000 forex swap contracts offered at an auction on Wednesday. The welfare announcement added to the evidence that there is little appetite for the long-term fiscal squeeze needed to stabilize Brazil's public finances, said William Jackson, chief emerging market economist at Capital Economics. "Taken together with slower growth and higher interest rates, we think that the public debt-to-GDP ratio is likely to be on an upwards trajectory from next year. This feeds into our view that government bond yields will climb higher and that the real will weaken further from here," Jackson said. Mexico's peso gained 0.3% as its economy expanded by 5.0% in September compared with the same month last year, a preliminary estimate from national statistics agency INEGI showed. The heavily controlled Argentine peso was flat against the dollar. The government froze prices of over a thousand household goods until early 2022 in a bid to tamp down inflation. "In our view, this policy is unlikely to curb inflation, and if it has any effect, it will be in the very short term at the cost of increasing medium-term risks when prices unfreeze," strategists at Citi said. The South American nation is battling to cool inflation that is running at an annual rate of over 50%, sapping savings and dragging on economic growth. Among stocks, a rally in Brazilian banks and energy companies far-outweighed an 2.5% drop in miner Vale, sending the Bovespa stocks index 0.8% higher. Vale dropped after saying it was slowing down production of low-margin iron ore in the fourth quarter by about 4 million tonnes due to low prices, and could cut back output in 2022 if prices did not rise. Mexican telecom firm America Movil and airline operator Aeromexico lost 1.5% and 0.5%, respectively, after weak third quarter earnings updates. Key Latin American stock indexes and currencies: Stock indexes Latest Daily % change MSCI Emerging Markets 1302.10 0.58 MSCI LatAm 2237.24 0.42 Brazil Bovespa 111589.93 0.83 Mexico IPC 52325.75 -0.15 Chile IPSA 4037.34 1.06 Argentina MerVal 86691.20 2.827 Colombia COLCAP 1413.00 -0.25 Currencies Latest Daily % change Brazil real 5.5402 0.98 Mexico peso 20.1731 0.27 Chile peso 813 -0.32 Colombia peso 3764.56 -0.01 Peru sol 3.9362 -0.02 Argentina peso 99.3500 -0.04 (interbank) (Reporting by Shashank Nayar in Bengaluru Editing by Mark Potter and Will Dunham)

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