Brazil Real Leads Declines as Morgan Stanley Says Rally Overdone

Brazil’s real led global currency losses before Wednesday’s decision on interest rates as Morgan Stanley, Societe Generale SA and Credit Agricole SA said recent gains would be hard to sustain.

The currency fell 0.7 percent to 2.9373 per dollar at the end of trade in Sao Paulo, the worst performance among 31 major currencies tracked by Bloomberg, after earlier rising 1.2 percent. The five-session advance from April 20 through Monday is the longest stretch of increases since June.

“Technical indicators suggest the rally is overstretched as the real has been bought too quickly over a too short period of time,” Ipek Ozkardeskaya, an analyst at London Capital Group, said by e-mail.

Morgan Stanley said in a report that gauges of momentum indicated that the real is overbought and that the rally in iron ore supporting Brazilian terms of trade is probably almost over. Brazil may respond to recent currency gains by unwinding outstanding foreign-exchange swaps that were sold to support the real, Morgan Stanley said.

The real’s seven-day relative strength index versus the dollar was above the level of 70 that some traders interpret as a sign that the local currency’s gains may be hard to sustain.

Credit Agricole recommended buying the dollar at Monday’s closing level of 2.92 reais, citing recent reports indicating the Brazilian economy remains weak. SocGen said the real is vulnerable to renewed pressure.

“We think the dollar versus the real has neared the bottom of its range,” Credit Agricole strategist Mark McCormick wrote in research note.

Rate Outlook

Buying the real with borrowed dollars in so-called carry trades has returned 10 percent this month, the most among 31 major currencies after the Russian ruble. In such trades, investors get funds in countries where borrowing costs are low, including the U.S., and buy assets where yields are higher.

Brazil’s policy makers are expected to lift the target lending rate Wednesday by another half-percentage point. The Federal Reserve, meanwhile, is expected to hold its benchmark lending rate near zero as the economy shows signs of slowing.

Swap rates, a gauge of expectations for Brazil’s borrowing costs, rose 0.04 percentage point to 13.29 percent on the contract maturing in January 2017. They climbed 0.25 percentage point last week.

Inflation in the 12 months through mid-April accelerated to an 11-year high of 8.22 percent even as the central bank raised borrowing costs to 12.75 percent. An increase of another half-percentage point Wednesday would match the three previous moves to boost interest rates.

The real rose 3 percent last week as concern eased that allegations of corruption at Petroleo Brasileiro SA would lead to a junk credit rating for the South American nation. The state-controlled oil company avoided an acceleration of its debt payments and paved the way for renewed access to financial markets when it published its first audited results since August.

The central bank extended the maturity of currency swap contracts worth $517.4 million Tuesday. Brazil halted the sale the swaps supporting the real in March.

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