Brazil’s real rose for the first time in three days on speculation the nation’s higher interest rates will attract foreign investors even as Latin America’s largest economy shrinks.
The central bank signaled this month that policy makers will keeping raising borrowing costs to bring inflation back to target by the end of 2016 while the Federal Reserve lowered its forecast for the benchmark U.S. lending rate next year. Buying the real with borrowed dollars in carry trades has returned 6.85 percent in the second quarter, the most among 16 major currencies tracked by Bloomberg.
“A more-dovish-than-expected Federal Open Market Committee meeting, together with a hawkish Brazilian central bank, gave the high-yielding real a lift,” Citigroup Inc. strategist Kenneth Lam wrote in a research report to clients.
The real climbed 0.6 percent to 3.0803 per U.S. dollar at the close of trade in Sao Paulo, extending its quarterly rally to 3.8 percent, the best performance among major Latin American tenders.
Analysts raised their projection for Brazil’s benchmark lending rate at year-end to 14.25 percent from 14 percent, according to the median of about 100 estimates in a central bank survey published Monday.
Brazil is the only member of the Group of 20 nations raising borrowing costs this year, contributing to a lag in growth. Inflation, however, remains above the official target after the central bank lifted its benchmark rate for a sixth straight time June 3, increasing it to 13.75 percent. The Fed, meanwhile, has held its rate at zero to 0.25 percent since 2008.
In carry trades, investors get funds in countries where borrowing costs are low, including the U.S., and buy assets where yields are higher.
Swap rates, a gauge of expectations for Brazil’s borrowing costs, decreased 0.12 percentage point to 13.92 percent on the contract maturing in January 2017.
The real also rose Monday as Brazil’s current-account deficit narrowed in May to $3.4 billion from $6.9 billion. The gap in the broadest measure of trade in goods and services was smaller than the median forecast of economists surveyed by Bloomberg, which called for a deficit of $4.6 billion.
In a sign of reduced concern over the real’s fluctuations, the central bank extended the maturity on 5,200 contracts Monday, down from 6,300 earlier this month and 8,100 in May.