Brazil's Real Advances as Commodities Gain on Possible Stimulus

  • Investors expect central banks to expand stimulus measures
  • Raw materials account for about half of Brazilian exports

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Brazil’s real advanced along with emerging-market currencies as commodity prices rose amid speculation that central banks worldwide will expand stimulus measures to offset concerns about slowing global growth.

The currency climbed 1.5 percent to 4.0938 per dollar in Sao Paulo, paring its fourth straight weekly decline to 1.1 percent. The real closed at a four-month low on Thursday. The S&P GSCI Index of raw materials jumped 4 percent, while a gauge of exchange rates for 20 developing nations rose 1 percent. Commodities account for about half of Brazil’s exports.

The turnaround in global sentiment came amid signs central banks may be prepared to act after $7.8 trillion was erased from the value of global equities in the first three weeks of the year. China said it will keep intervening in its equity market and has no intention of further devaluing the yuan, the Bank of Japan may add stimulus at its meeting next week and European Central Bank President Mario Draghi indicated he may follow suit in March.

"Amid this risk-on environment, carry traders are not missing the opportunity to drive some cash into Brazil after it hit a four-month low," said Ipek Ozkardeskaya, an analyst at London Capital Group. "The recovery in oil and commodity prices is also helping Brazilian assets."

The real fell 33 percent last year, the most among major currencies, after Brazil’s credit rating was cut to junk as President Dilma Rousseff struggled to shore up the budget amid an economic slowdown and a widening corruption investigation. The currency extended its slide into this year as a slowdown in China, the South American nation’s top trading partner, threatened export revenues.

Brazil’s Finance Minister Nelson Barbosa ruled out introducing capital controls to fight the recent drop in the real, according to an interview with the Financial Times in Davos. He also said that inflation will slow and the economic situation will stabilize in second half of the year.

The real could weaken to as low as 4.50 per dollar amid further economic slowdown in both Brazil and China, Juan Carlos Rodado, the director of Latin America research at Natixis North America, said in an interview from New York. Societe Generale said yesterday that the real seems poised to drop to a record 4.40 per dollar within weeks.

“You have all the elements to avoid Brazil,” Rodado said. “We can have a short-term rally depending on what happens with commodities, but the path is clear for the real in the medium term: weakness.”

Policy makers said late Wednesday they would keep the benchmark Selic rate at 14.25 percent, surprising economists surveyed by Bloomberg, most of whom had expected at least a 0.25 percentage point increase. The bank cited global uncertainty for the decision, which came a day after the International Monetary Fund cut its estimates for Brazil’s economy, forecasting a 3.5 percent contraction this year and zero growth next year. That would mark the longest period without expansion in more than a century.

Swap rates on the contract maturing in January 2017, a gauge of expectations on interest-rate moves, dropped 0.035 percentage point to 14.85 percent. They dropped 0.695 percentage point this week.

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