Brazil’s Real Climbs Most Since June as Carry Trade Gains Appeal

Updated on
  • U.S. economic data fuels bets higher rates won’t come soon
  • Real is world’s best carry trade this year, with 34% return

Investors are piling into Brazil’s real to take advantage of the highest interest rates among the world’s biggest economies, pushing the currency up the most in two months.

The real added 2.7 percent to 3.1964 per dollar Tuesday in Sao Paulo as speculation the Federal Reserve is in no hurry to raise rates buoyed emerging-market assets and overshadowed concern new President Michel Temer will struggle to win backing for unpopular fiscal measures. Borrowing dollars to buy the real has returned 34 percent this year, the most among more than 40 currencies tracked by Bloomberg.

The real is particularly sensitive to global interest rates because Brazil’s local benchmark -- at 14.25 percent -- is the highest among Group of 20 countries and is more than 28 times the overnight rate in the U.S. As traders dialed back wagers for a Fed interest-rate increase this month amid speculation central banks around the world will seek to avoid jolting financial markets, the real became a more attractive option for carry-trade investors.

"The real is getting a boost from the positive environmental for higher yielding assets," said Georgette Boele, a strategist at ABN Amro Bank NV in Amsterdam who forecasts the currency will weaken to 3.35 per dollar by year end.

After last week’s below-forecast payrolls data in the U.S. and a surprise slowdown in manufacturing, traders are pricing in a 34 percent chance the central bank will raise borrowing costs at its September meeting, according to fed funds data compiled by Bloomberg.

Swap rates on the contract maturing in January 2018, a gauge of expectations for Brazil’s interest-rate moves, dropped 0.04 percentage point to 12.5 percent.

Brazilian assets have led global gains this year on speculation that a new government would help pull Latin America’s biggest economy from its worst recession in a century. Temer, who officially took over Aug. 31 following the impeachment of Dilma Rousseff, has vowed to jump start the economy and promised to trim a budget deficit and make Brazil a more attractive destination for investment.

While protesters across Brazil call Temer’s presidency a coup and demand new elections, his allies in Congress are pushing for changes in a bill to cap spending by states, according to Folha de S. Paulo. Former presidential candidate Aecio Neves is asking for a quick fiscal adjustment while threatening to withdraw his party’s support, according to Valor Economico.