Mrs. Watanabe Aids Brazil’s Rousseff by Backing Real: CurrenciesJohn Detrixhe and Ben Bain
Brazilian President Dilma Rousseff is receiving a helping hand from Japanese retail investors in her efforts to bolster the real and curb inflation.
Japan’s banks underwrote 36.7 billion yen ($350 million) of notes in the Brazilian currency in December, the biggest slice of the emerging-market uridashi bond market, according to data compiled by Bloomberg and Nomura Holdings Inc. Investors who buy these notes are switching their allegiance to the real from Mexico’s peso, which accounted for the biggest chunk of sales in the first eight months of 2013.
While Mexico’s economy is forecast in Bloomberg surveys to grow 1.2 percentage points faster this year than its South American neighbor’s, Japanese investors are increasingly attracted to Brazil’s rising bond yields. That’s just the boost Rousseff needs after the real’s 13 percent slide in 2013 helped push inflation above the central bank’s 6.5 percent upper limit.
“Issuance is now shifting from Mexican peso into Brazilian real,” Yujiro Goto, a London-based senior currency strategist at Nomura, Japan’s largest brokerage, said in a Jan. 6 phone interview. “If we offer Mexican peso at this moment, the return would be much lower.”
Brazil’s two-year bonds yield 11.8 percent, or about 8 percentage points more than equivalent Mexican notes. The difference has widened from 2.6 percentage points in late 2012.
The real has grown in importance for uridashi noteholders, who are mainly retail investors. Brazil’s currency accounted for about 49 percent of non-yen issuance in November, compared with 8 percent for Mexico’s peso, data compiled by Bloomberg show. From January through August, peso sales totaled the equivalent of 222.4 billion yen, more than double the 101.6 billion yen issued in real, according to Nomura data.
Japan’s retail investors are often referred to as “Mrs. Watanabe” because housewives tend to control family budgets. Japanese household assets total about 1,598 trillion yen, according to data from the nation’s central bank.
The influx of Japanese cash is a fillip to Brazil’s attempts to strengthen its currency, which fell last year by the most since 2008. The central bank announced a $60 billion currency intervention program on Aug. 22, alongside the world’s most aggressive series of interest-rate increases.
“Uridashi is interesting because it’s a large flow and it’s a very large market,” Alejandro Silva, a Chicago-based founding partner of Silva Capital Management LLC, which oversees $800 million of emerging-market assets, said Dec. 18 in a phone interview from Mexico City. “In the emerging-market currencies, the flow does seem to have an impact in terms of actual purchasing of the currency.”
The Central Bank of Brazil raised its main target rate by 2.75 percentage points to 10 percent last year after surging consumer prices damped business and consumer confidence. That’s the biggest increase among 49 economies tracked by Bloomberg, followed by Indonesia’s 1.75 percentage points and 0.5 percentage point in Pakistan.
The rate increases helped push the yield on Brazil’s two-year government note to 12 percent on Dec. 3, the highest since August 2011, data compiled by Bloomberg show. The nation’s annual inflation rate slowed to 5.77 percent in November from 2013’s peak of 6.7 percent in June.
Rousseff said last month in a televised address that the government is “steadfast on its commitment to fight inflation.”
Mexico’s peso is losing its appeal to uridashi investors after central bank Governor Agustin Carstens cut the nation’s key rate to a record 3.5 percent in October. The yield on the nation’s two-year notes has fallen to 3.67 percent from 4.77 percent on Jan. 7, 2013.
“One of the most important differences right now between Mexico and Brazil are coupon rates,” Gabriel Casillas, the chief Mexico economist and head of research at Banorte, said in a Jan. 6 phone interview from Mexico City. “With all these hikes in Brazil, the coupon rates of several bonds actually are now very attractive, even with Brazil’s story not as appealing as the Mexican one.”
The peso gained 20 percent versus Japan’s currency last year, the most among Latin American peers, and reached about a six-month high of 8.1039 yen on Dec. 19. The real gained 5.4 percent versus the yen, data compiled by Bloomberg show.
Against the U.S. currency, the real reached a four-month low of 2.4095 per dollar on Jan. 2 before trading at 2.3888 at 12:05 p.m. New York time. The peso weakened 1.4 percent against the greenback last year and is down 0.4 percent in 2014 to 13.0934 per dollar.
Investors in Japan have sought higher-yielding, emerging-market currencies as their own central bank kept rates near zero and embarked on unprecedented monetary easing to end 15 years of deflation. Japan’s easing program contributed to the yen’s 16 percent slump against a basket of nine major peers over the past year, the biggest drop in the group, according to Bloomberg Correlation-Weighted Currency Indexes.
While there’s also demand for reinvestment in real-based debt, peso uridashi issuance is likely to rebound as Mexico’s economy improves, according to Shinichiro Kadota, a foreign-exchange strategist at Barclays Plc in Tokyo.
“Improvement in Mexico’s economic fundamentals will be a catalyst for uridashi issuance to increase from the country,” Kadota said by phone last month. “There won’t probably be an additional rate cut.”
Mexico had its credit rating raised one step to BBB+, three levels above junk, on Dec. 19 by Standard & Poor’s. The company called constitutional changes passed last month that allow private concerns to drill for oil in the country a “watershed moment” for investment and growth.
Brazil, graded one step lower at Baa2 by Moody’s Investors Service, had the outlook on its rating reduced to stable from positive in October because of a slowing economy. Mexican gross domestic product will expand 3.5 percent this year and 3.9 percent in 2015, compared with 2.3 percent and 2.8 percent for Brazil, economists surveyed by Bloomberg predict.
Morgan Stanley issued 141.6 million reais ($59.7 million) of uridashi notes on Sept. 9, which pay a coupon of 9.2 percent for an August 2016 maturity, data compiled by Bloomberg show. A day later, the New York-based bank issued 39.6 billion pesos ($3 billion) of similar-maturity debt with a 3.65 percent coupon.
“It’s not surprising to me, as they compare yields, that they find Brazil very attractive,” said Silva of Silva Capital. “The Brazilian pick-up is so much higher than the others that it does make sense to me why they’d be interested.”