Brazil’s Real Leads Losses as BNP Paribas Says Pain Not Over Yet

Brazil’s real led declines among major currencies and fell to a 12-year low as BNP Paribas SA and London Capital Group said it was poised for another 10 percent decline.

The real tumbled last month the most since March as Standard & Poor’s said it may lower the nation’s credit rating to junk and the central bank signaled it would avoid raising interest rates. The local currency may extend its drop as the U.S. Federal Reserve prepares to increase borrowing costs, limiting the desirability of Brazil’s assets to investors looking for higher yields

“The real is on track to test 2002 levels, so another 8 to 10 percent decline by year-end is possible,” Martial Godet, the head of emerging-market equities and derivatives strategy at BNP Paribas, said by e-mail.

The real depreciated 0.9 percent to 3.4511 per dollar, the weakest level on a closing basis since March 2003. The loss was the biggest among 16 major currencies tracked by Bloomberg.

Weighing on the real is the unwinding of carry trades in which investors get funds where rates are low, including the U.S., and purchase assets in nations that offer higher yields. Buying the real with borrowed dollars lost 8.2 percent last month, the worst performance among 43 major currencies after the Russian ruble and the Colombian peso.

“The downside risks prevail and the carry returns will squeeze as the U.S. moves toward higher rates,” Ipek Ozkardeskaya, a market analyst at London Capital, said by e-mail. A plunge in the real to “3.50/75 is not a dream should the Fed decide to proceed with policy normalization.”

Beyond Target

Brazil’s failure to meet fiscal goals, a contracting economy and President Dilma Rousseff’s sinking popularity caused the real to fall last week to 3.4, a level that analysts surveyed by Bloomberg had forecast wouldn’t be reached until the end of next year.

Swap rates, a gauge of expectations for changes in borrowing costs, climbed 0.17 percentage point to 13.60 percent Monday on the contract maturing in January 2017.

The local currency fell as the central bank avoided accelerating the pace of foreign-exchange swap rollovers. It extended the maturity on 6,000 contracts supporting the currency, the same as in daily offerings last week.

“The fact that the central bank refrained from increasing the rollover sends a sign that the government does not want a stronger real,” Paulo Nepomuceno, a fixed-income strategist at Coinvalores CCVM, said by phone from Sao Paulo.

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