Brazil Real Declines as ECB Comments Overshadow Inflation Data

  • Mario Draghi downplayed the need for further stimulus
  • Real is best carry trade this year in euros and dollars

Brazil’s real declined as speculation the European Central Bank is unlikely to immediately undertake more stimulus overshadowed data that bolstered the case for keeping local interest rates high.

The currency slid 0.6 percent to 3.2143 per dollar Thursday in Sao Paulo after it gained as much as 0.9 percent. While steeper borrowing costs may lure investors looking for higher returns to Brazil, ECB President Mario Draghi’s comment that there’s no need for more monetary easing sent emerging-market currencies down.

After leaving the main refinancing rate at zero and the deposit rate at minus 0.4 percent, Draghi said the ECB will study options to ensure the bond-buying program doesn’t run out of securities to purchase. With six months to go until the scheduled end of its program, the authority needs to balance increasing concerns about asset scarcity.

"This has fueled expectation for reduced euro liquidity and investors ran to the U.S. dollar" said Jason Vieira, chief economist at Infinity Asset Management in Sao Paulo.

A faster-than-estimated acceleration in a weekly inflation index fueled speculation Brazilian policy makers will keep the benchmark rate at 14.25 percent to damp price increases. The Getulio Vargas Foundation IPC-S report showed prices up 0.34 percent, compared with an average estimate of 0.31 percent.

The real is particularly sensitive to global interest rates because it’s one of the most popular currencies for the so-called carry trade, in which investors borrow in dollars, yen or euros and buy emerging-market currencies to take advantage of higher yields. The local benchmark is the highest among Group of 20 countries and is more than 28 times the U.S. overnight rate, making Brazil’s currency the best carry trade in the world this year. Gains have also been fueled by optimism that new President Michel Temer will be able to shore up the country’s budget and end the longest recession in more than a century.

"As the government tries to reassure investors that the fiscal adjustment is on track, the real benefits in the short term from being the world’s most attractive carry trade," according to Italo Abucater, head of foreign-exchange trading at Icap Brasil, who expects the real to rise to as strong as 2.9 per dollar in the next two months.

Swap rates on the contract maturing in October 2016, a gauge of expectations for Brazil’s interest-rate moves, rose 0.01 percentage point to 14.14 percent.

Before it's here, it's on the Bloomberg Terminal.