Brazil Real Rises on Renewed Demand for World’s Best Carry Trade

  • Real gains for a fourth day on policy-makers’ hawkish tone
  • Carry-trade appetite offsets concern over politician’s arrest

Brazil’s real gained for a fourth straight day, posting the biggest advance in emerging markets Thursday, after the central bank’s hawkish statements fueled investor appetite for the world’s best carry trade.

The currency appreciated 0.9 percent to 3.1420 per dollar Thursday in Sao Paulo, pushing it to a two-month high. Although the central bank led by President Ilan Goldfajn voted unanimously to cut the benchmark Selic rate by 25 basis points to 14 percent Wednesday, in line the median estimate by analysts, it also signaled that it sees lingering risks for inflation. Brazilian swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, rose 0.18 percentage point to 12.10 percent.

The real is the world’s best-performing currency in 2016 as high interest rates attract investors hunting for better yields and amid speculation that President Michel Temer’s government will help pull the country out of its worst recession in a century. Buying the real with borrowed dollars in a so-called carry trade has returned 39 percent this year, the most among 42 currencies tracked by Bloomberg.

“The carry deal is gaining appeal as traders reduce bets for a more aggressive pace of rate cuts,” said Camila Abdelmalack, the chief economist at CM Capital Markets in Sao Paulo.

Renewed appetite for the carry trade offset speculation that reforms could be delayed after the arrest of Eduardo Cunha, the former speaker of Brazil’s lower house of Congress who led the drive to impeach President Dilma Rousseff. Cunha was detained by federal police on Wednesday as part of a massive corruption probe, fueling concern among Brazilian politicians that he may agree to a plea bargain and allege wrongdoing against other top lawmakers, O Estado de S. Paulo newspaper reported.

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