Brazil Real Rises as U.S. Stimulus Outlook Fuels Risk Appetite

Brazil’s real gained as the U.S. and Japan signaled further stimulus measures that could fuel demand for the Latin American country’s higher-yielding assets and overwhelm government measures to stem currency gains.

The real strengthened 0.4 percent to 1.8276 per U.S. dollar at 3:04 p.m. in Sao Paulo. The yield on the Brazilian interest- rate futures contract due in January 2014 fell seven basis points, or 0.07 percentage point, to 9.13 percent.

The real gained, rebounding from two days of losses, along with most major and emerging-market currencies after Federal Reserve Vice Chairman Janet Yellen signaled U.S. borrowing costs will remain low through 2014 and Japanese officials said they will pursue “powerful easing” to overcome deflation. Brazil will adopt measures to protect manufacturers from the “monetary tsunami” created by developed nations that is driving up the real, President Dilma Rousseff said last month.

“The sentiment abroad is one of monetary easing,” Italo Lombardi, Latin America economist at Standard Chartered Bank, said by phone from New York. “This weakens the dollar, but there’s a limit. The market knows the central bank can intervene if the dollar gets close to 1.80.”

Brazil’s central bank said it bought dollars in the spot market for a second consecutive day today for 1.8263 reais per dollar. The bank has intervened in the spot market 15 times since the beginning of March.

Brazil’s currency has traded weaker than the 1.80 level since mid-March, when the government expanded financial taxes to discourage capital inflows and protect exporters.

Currency Forecasts

The currency will end the year at 1.76 per dollar, according to the median estimate of 20 economists surveyed by Bloomberg. They forecast in September it would strengthen to 1.55 by year-end. The real has weakened 1.6 percent in the past month, the second-most in Latin America.

Yields on rate-futures contracts maturing before 2015 fell after Sao Paulo-based newspaper Valor Economico said the central bank may resume cutting borrowing costs after pausing at 9 percent to assess inflation.

“The market is increasing bets the central bank will go back to cutting rates a little further ahead, depending on the external environment,” Luciano Rostagno, chief strategist at Banco West LB in Sao Paulo.

In the minutes of its March 6-7 minutes, the central bank said it saw a “high probability” of the rate falling to “levels slightly above the historical lows and stabilizing” there. The comment led traders on March 15 to unwind bets the rate, known as Selic, would fall below 9 percent.

Rate Outlook

Traders are anticipating central bank President Alexandre Tombini will reduce the Selic rate by 75 basis points at next week’s monetary policy meeting, according to futures yields. The market is split on whether Tombini will cut another 25 basis points in May.

Yields also fell on data showing more Americans than forecast filed claims for jobless benefits last week, a sign the pace of improvement in the U.S. labor market is slowing, Rostagno said.

“It was a bad number. For rate futures, this gives more ammunition for a move downward,” he said.

To contact the reporters on this story: Josue Leonel in Sao Paulo at jleonel@bloomberg.net; Gabrielle Coppola in Sao Paulo at gcoppola@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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