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Goldman Says Real, Lira, Rand Must Weaken to Close Trade Deficit

Brazil’s real, Chile’s peso and Turkey’s lira may fall “significantly” to curtail widening current account deficits, according to Goldman Sachs Group Inc.

The lira, South African rand and India’s rupee would need to depreciate about 30 percent on a trade-weighted basis, while the real and peso need to fall about 20 percent, London-based analyst Themistoklis Fiotakis wrote in a note today. While the assessments aren’t forecasts, they signal where the currencies “might ultimately belong,” the analyst said.

The currencies are among the worst performers in emerging markets over the past month, with the real falling 10 percent since May 21, as the Federal Reserve signaled plans to taper off monetary stimulus. Rising bond yields in U.S., Germany and Japan are attracting funds away from emerging markets, making it more difficult for the countries to finance the deficits in their current accounts, the broadest measure of international trade and service.

“A larger exchange rate depreciation might be necessary, which will bring external accounts back into full balance,” Fiotakis wrote. “Although some of the recent shifts may prove to be overshoots in the short term, the EM bond and FX selloff of the last month is likely to constitute only a small part of a longer trend for EM assets.”

Brazil’s current account deficit widened to a record $73 billion in the year through May, equivalent to 3.2 percent of gross domestic product, according to a central bank report today. Chile’s deficit reached 4 percent of the GDP in the first quarter, the widest since 1998, while Turkey’s amounted to 5.9 percent at the end of March, Bloomberg data show.

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