Brazil Real Rises to One-Year High as Yields Lure Carry Trades

  • Central banks cutting rates makes real yield more attractive
  • Brazil’s real is the world’s best performer this year

Brazil’s real climbed to a one-year high after policy makers in Latin America’s largest economy sought to reassure investors and as sought out securities paying some of the world’s highest interest rates.

The real gained 0.9 percent to 3.1655 per dollar on Friday, extending the weekly advance to 2.6 percent. The Bloomberg Dollar Spot Index, which tracks the U.S. currency against a basket of its top peers, added 0.3 percent. The real closed stronger for the fourth consecutive week.

Bond buyers seeking an alternative to negative yields on government debt in Europe and Japan are heading to Brazil, where the benchmark interest rate is 14.25 percent. Officials have signaled that’s not likely to come down anytime soon, and central bank chief Ilan Goldfajn reiterated that stance in an interview published Friday in O Estado de S. Paulo when he said inflation risks persist. Buying the real with borrowed dollars in a so-called carry trade has returned 34 percent this year, the most in the world.

“It’s all about yield,” said Win Thin, an emerging-market strategist at Brown Brothers Harriman & Co. in New York. “Every central bank in the developed world, except the Fed, is easing. With negative rates everywhere, investors are piling into emerging markets.”

Local newspapers reported that Brazil’s economic team is working to convey a positive message to investors amid criticism in recent days that it’s backtracked on some fiscal adjustment measures.

Finance Minister Henrique Meirelles said business and consumer confidence has rebounded and forecast that if the economy grows some 2 percent next year, it won’t be necessary to increase taxes, according to Valor Economico newspaper. He and Goldfajn met with several market players on Thursday to try to boost confidence, also according to Valor.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest rates, dropped 0.07 percentage point to 12.71 percent, extending this week’s decline to 0.12 percentage point.

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