Brazil's Real Advances as BNP Paribas Turns Positive on Economy

  • Brazilian real is no longer the most volatile major currency
  • Central bank refrains from announcing reverse currency swaps

Brazil’s real gained as a potential change in government bolsters investor confidence in Latin America’s biggest economy, winning over even long-time bears. 

After being “consistently downbeat” on the country for the past few years, BNP Paribas said in a note to clients Thursday that it’s now “time to turn positive on Brazil’s outlook.” 

The bank joins a chorus of analysts and investors who have turned Brazil’s real into the best performing major currency this year and fueled a rally in stocks on the view that President Dilma Rousseff will be impeached and a new administration will be better positioned to pull Brazil out of its worst recession in a century. Vice President Michel Temer -- who would succeed Rousseff should she be removed -- has pledged to put the economy back on track. Gross domestic product is forecast to shrink for a second year in 2016, unemployment is rising and consumer confidence is at a record low.

"A new administration under Michel Temer has a golden opportunity to engineer a turnaround in the Brazilian economy if -- as we expect -- he manages to put in place a solid economic team and build sufficient support in Congress to implement unpopular, but much needed measures," BNP economists lead by Marcelo Carvalho wrote.

The real has surged 12 percent this year. Beginning March 21, policy makers re-introduced a program created in 2005 to prevent the real’s appreciation from curtailing exports and have since sold $38.4 billion of reverse swap contracts, which are the equivalent of buying dollars in the futures market, including $2.5 billion this week.

The real advanced 0.4 percent to 3.5346 per dollar on Thursday, the best performance among 16 major currencies as the central bank refrained from intervening to slow gains as higher commodity prices lifted assets in developing nations.

"In Brazil, the central bank on the sidelines helps the real today," said Mauricio Oreng, a senior strategist at Rabobank in Sao Paulo.

One-month implied volatility in the real advanced 0.2 percentage point to 18.4 percent, after declining to the lowest since July 22 earlier Tuesday. Implied volatility is the the second-highest among major currencies tracked by Bloomberg after it fell below the South African rand on Wednesday for the first time since March.

Swap rates on the contract maturing in January 2017, a gauge of expectations for interest rates, rose 0.015 percentage point to 13.68 percent.

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