Brazil’s Real Rallies on Bets Higher Rates Will Draw Investors

  • Currency closed at the strongest level since July 2015
  • Brazilian real offers best return for carry investors

Brazil’s real rose to an 11-month high on speculation that a wave of monetary stimulus in developed markets will make the country’s relatively high interest rates more attractive to foreign investors, even as Latin America’s largest economy shrinks.

The currency advanced 2.6 percent to 3.2206 per dollar on Wednesday. A gauge of emerging-market currencies rose amid speculation that policy makers around the world will step in to ease concern caused by Britain’s vote to leave the European Union, including a pause in the Federal Reserve’s tightening cycle.

The real climbed for a second day after the central bank said Tuesday there is no room to cut the benchmark interest rate, citing the need for further fiscal adjustment. The broadest measure of inflation accelerated more than all economists estimated in June, according to data from the Getulio Vargas Foundation, an education and research institution. Buying the real with borrowed dollars in a carry trade has returned 11.6 percent in the past month, the most among 42 currencies tracked by Bloomberg.

"Brexit has also pushed Fed rate hike expectations way into the future and created some interest in carry -– as long as the carry currency is sufficiently far away from Europe," Chris Turner, the global head of strategist at ING Groep NV in London, wrote in a report to clients. "Thus the real is performing well."

Brazil posted a foreign exchange inflow of $1.87 billion from the beginning of the month through June 24, compared with a $3 billion outflow in May, according to data from the central bank released on Wednesday. The outflow so far this year has been $4.98 billion.

Traders are now pricing in zero probability of a U.S. rate increase until at least December. A month ago, they saw a 30 percent probability of an increase in June. The Bloomberg Commodity Index, which measures returns on raw materials, extended Tuesday’s 1.9 percent rally with a 1.1 percent advance.

Both the real and the Ibovespa have led global gains this year on speculation that Acting President Michel Temer will be able to pull Latin America’s largest economy out of the worst recession in a century. The central bank doesn’t expect inflation to slow below the official target of 4.5 percent until the first quarter of 2018, underscoring the challenges that lie ahead for its new chief Ilan Goldfajn and Finance Minister Henrique Meirelles.

JPMorgan Chase & Co. improved its year-end forecast for the real to 3.50 reais per dollar from 3.90 reais. On average, analysts surveyed by Bloomberg predict the currency will weaken to 3.75 per dollar in the fourth quarter.

Brazilian swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, rose 0.14 percentage point to 12.82 percent.

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