World Cup Opens Arbitrage Opportunity for Brazil BoyJoshua Goodman
The freefalling Brazilian real is unintentionally creating a boon for soccer fans seeking tickets to next year’s World Cup, with the currency’s tumble opening up a 20 percent difference between local and overseas prices.
“What an arbitrage opportunity,” John Welch, a strategist at Canadian Imperial Bank of Commerce in Toronto who was raised in Brazil and plans to attend the tournament next June, said in a phone interview. “Without a doubt some people will be transferring dollars at the market rate and then buying tickets in reais.”
Soccer governing body FIFA set a rate of 2 reais per dollar for pricing tickets that went on sale this week, compared with 2.3685 on international currency markets today. The real has tumbled 14 percent in the past three months, the most among 31 major currencies tracked by Bloomberg.
The real is bearing the brunt of an exodus from emerging markets as the U.S. Federal Reserve prepares to reduce the money it pumps into the world economy. To stem the decline, which threatens to push inflation above the 6.5 percent upper limit of the government’s target range, Brazil’s central bank has sold more than $54 billion of swaps since the end of May and announced yesterday a $60 billion intervention program.
Starting today, the central bank will auction $1 billion of dollar loans on Fridays and offer the equivalent of $500 million of foreign-exchange swaps daily, Monday through Thursday, it said in a statement. The program will run through Dec. 31.
Analysts have had trouble keeping up with the real’s decline, reducing their year-end forecasts for the currency to 2.25 per dollar, from 2 in June, according to the median of more than 40 estimates compiled by Bloomberg.
Banco Santander SA, the second-most-accurate forecaster for the real in the second quarter according to Bloomberg data, sees the currency strengthening to 2.3 per dollar by the end of the year. The real dropped to as low as 2.4549 on Aug. 21, the weakest level since December 2008, and gained as much as 3 percent today to 2.3635.
Brazilian President Dilma Rousseff convened an emergency meeting Aug. 21 with senior finance officials, including central bank President Alexandre Tombini, to discuss the real’s drop.
Policy makers have raised the target lending rate by 1.25 percentage points this year to 8.5 percent and will increase it again to 9 percent on Aug. 28, according to all 16 economists surveyed by Bloomberg News.
“The recent depreciation of the Brazilian real has brought it back to equilibrium levels,” strategists including Claudio Irigoyen at Bank of America Corp. in New York wrote in a client note yesterday. “A more aggressive central bank exchange-rate intervention and interest-rate hikes” may support the currency, the analysts wrote, revising their year-end forecasts to 2.4 per dollar from 2.2 previously.
Brazil has the second-highest benchmark interest rate in the Group of 20 after Argentina. The high rate had attracted investors in carry trades who borrow money in countries with lower borrowing costs and invest the proceeds elsewhere.
That’s changing as capital flees the country on expectations that the Fed is preparing to reduce its $85 billion of monthly bond purchases. Minutes of the Federal Open Market Committee meeting published Aug. 21 showed that most members were “broadly comfortable” with the plan to trim stimulus in 2013.
Growth in Latin America’s biggest economy has stagnated, further hastening the flow of capital from the country. Brazil’s gross domestic product expanded 1.9 percent in the first quarter from a year earlier, official data showed May 29, falling short of the 2.3 percent growth forecast by economists.
“Carry trades only work when countries have high interest rates and high growth,” Tony Volpon, the head of emerging-market research for the Americas at Nomura Holdings Inc., said in an Aug. 20 phone interview from New York. “They tend to fall apart quickly when you have low growth.”
FIFA determined its exchange rate for the real in May based on a year-ahead forecast for the currency by 30 international banks, the soccer governing body said in an e-mailed statement. Ticket prices range from $90 for a group-stage match to $990 for a seat for the final in Rio de Janeiro.
Only residents of Brazil can buy tickets in reais for themselves and as many as three named guests, and proceeds of local sales are used for expenses in the country, limiting organizers’ exposure to currency fluctuations, FIFA said.
South Africans also benefited from a favorable exchange rate when tickets went on sale for the 2010 World Cup, though the price gap vanished by the time the tournament started 16 months later. The nation’s rand, which strengthened 12 percent that year, has slipped 6.8 percent in the past three months, according to data compiled by Bloomberg.
Welch, 53, who’s married to a Brazilian, said the real is “way undervalued.” His firm had the third most-accurate forecast for the currency in the second quarter, and he sees it strengthening to about 2.15 per dollar by year-end, depending on the government’s policy response to its slide.
“It will be very difficult for the real to get back to 2 reais per dollar,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimentos, said in an Aug. 21 phone interview from Sao Paulo. “Not even winning the World Cup will be enough to reverse pessimism with regard to inconsistencies on the economic policy front.”