Brazil’s real declined to a 12-year low after Societe Generale SA said the currency will tumble to 4 per dollar as the government’s struggle to pare deficits makes further credit downgrades unavoidable. A drop in local bonds pushed yields to the highest level since March.
The worst economic contraction in 25 years, an escalating political scandal and a pledge by the Brazilian central bank to refrain from increasing interest rates have helped to push the real down 24 percent in 2015, the biggest retreat among 31 major currencies tracked by Bloomberg. The prospect of reduced demand for exports in China and an increase in U.S. borrowing costs by the Federal Reserve also weighed on the currency.
“The real is arguably the most vulnerable emerging-market currency at this point, facing rapidly worsening domestic fundamentals on top of a fragile external backdrop,” Bernd Berg, a London-based strategist at Societe Generale, wrote in a research report Wednesday.
The currency slid for a fifth straight day, falling 0.4 percent to 3.4854 per dollar on Wednesday, the weakest since 2003. The stretch of daily losses was the longest since March. The last time it fell to 4 per dollar was in October 2002. Yields on 10-year real-denominated government bonds sold in the local market rose to 13.36 percent, approaching a record high of 13.49 percent reached March 12.
Societe Generale said it counted a profit of almost 11 percent excluding interest-rate returns since the July 16 start of a trade betting against the real. The firm lowered its target for the currency to 4 per dollar from 3.6 and also adopted more pessimistic outlooks for the Mexican and Chilean pesos.
Last week, the real fell to 3.4 per dollar, a level that analysts surveyed by Bloomberg had forecast wouldn’t be reached until the end of next year.
The currency tumbled 9 percent in July as Standard & Poor’s changed its outlook on Brazil's debt to negative, indicating it may reduce the nation’s credit rating to junk, from the lowest level of investment grade.
Moody’s Investors Service, whose ranking for Brazil is one step higher, put the nation on negative outlook in September. Analysts from the rating company visited Brazilian central bankers last month.
Brazil posted a net outflow of $3.94 billion in July, the central bank reported Wednesday. That compares with a $4.69 billion net outflow in the prior month.
The real got a boost earlier Wednesday as U.S. companies made fewer hires than forecast in July, adding to the speculation that the Fed will wait a little longer before lifting borrowing costs. Such an increase would make emerging-market assets less attractive to international investors.
Brazilian swap rates, a gauge of expectations for changes in borrowing costs, climbed 0.16 percentage point to 13.76 percent Wednesday on the contract maturing in January 2017, the highest level since the central bank’s July 29 decision.
While policy makers increased the benchmark lending rate that day to an eight-year high of 14.25 percent, they changed their statement to say that holding borrowing costs steady “for a sufficiently prolonged period” is necessary to slow inflation toward the official target at the end of 2016.