The so-called carry trade, in which investors borrow in nations with low interest rates to buy higher-yielding assets, will help push the real to 1.6 per dollar by July from 1.7640 on April 9, according to UBS AG’s forecast, the highest among 16 compiled by Bloomberg. The median estimate shows the currency will rise to 1.75 per dollar by July, a 0.8 percent advance.
Interest rate futures contracts indicate traders expect the central bank to lift the benchmark rate by at least half a percentage point to 9.25 percent at its April 28 policy meeting and to 12.50 percent by May 2011. While Brazil’s 8.75 percent rate is a record low, it’s higher than near zero rates in the U.S., 1 percent in the euro-zone and 0.1 percent in Japan.
“The size of interest rate hikes in Brazil is so much bigger” than in developed economies, said Luis Fernando Lopes, a partner at Patria Investimentos, who helps manage 1.1 billion reais ($620 million) in assets in Sao Paulo. “It’s a whole other level. Only an external catastrophe could derail the appreciating trend in the real.”
The real gained 0.3 percent to 1.7580 per dollar at 2:34 p.m. New York time today, paring its drop this year to 0.8 percent. It climbed 33 percent in 2009, the best performance among 26 emerging-market currencies tracked by Bloomberg.
‘Ultimate Carry Trade’
“Brazil to me is the ultimate carry trade,” said Kevin Sollitt, head of foreign exchange at Paradigm Wealth Management in Cleveland, who helps manage $100 million in assets. “How can you short a currency with an interest rate close to 10 percent when the economy is on track to growth and the stock market is booming?,” said Sollitt, who forecasts the real will gain 7.6 percent to 1.64 per dollar by the end of this quarter.
The Bovespa stock index has climbed 3.5 percent this year, extending last year’s 83 percent gain, boosted by higher commodity prices and expectations gross domestic product will grow more than 5 percent this year, according to the median estimate in a Bloomberg survey of economists. The measure dropped 0.6 percent to 70,974.19 today.
Gains in the real may be limited if the government steps up dollar purchases to protect exporters, some investors say.
“The market knows the government becomes worried when the exchange rate approaches 1.75,” said Luciano Rostagno, chief Brazil strategist at CM Capital Markets, a Madrid-based brokerage.
Debt Sales
Brazil’s Treasury Secretary Arno Augustin said in January the nation may sell local debt to raise cash that can be used to buy dollars in the foreign-exchange market. In December, President Luiz Inacio Lula da Silva authorized the sovereign wealth fund to purchase dollars to create another government- related buyer of U.S. currency in addition to the central bank.
The central bank has bought dollars every day in the spot market since May 8, widening the country’s international reserves to a near-record $245 billion as of April 8.
Brazil plans to sell bonds in international markets in coming weeks, Augustin told reporters in Brasilia last week, adding that ratings agencies may raise the country’s debt grade.
The government may be less inclined to prevent gains in the real because of rising inflation, according to Patria’s Lopes.
‘Inflation Fight’
“A stronger real helps in the fight against inflation, which is not going well,” he said. “No one in the government will be pulling their hair out if the exchange rate goes beyond 1.7 per dollar.”
Annual inflation has accelerated for four months and has been above the central bank’s target of 4.5 percent in all three months of 2010. Consumer prices rose 5.17 percent in March from the same month a year earlier, the government’s statistics agency said last week.
The yield on the interest rate futures contract due in January 2011, the most traded on the Sao Paulo futures exchange, fell one basis point, or 0.01 percentage point, to 10.51 percent today, retreating from the highest level in three weeks.
