Bullish Real Bets Jump as Rates Undercut Mantega: Brazil Credit
2011-01-20 02:39:30.689 GMT
By Boris Korby and Ye Xie
Jan. 20 (Bloomberg) -- International investors are building
bullish bets on Brazil's real at the fastest pace in four months
as the central bank begins raising benchmark rates after a six-
month pause.
Wagers the currency will rise increased by a net 36,820 in
the week through Jan. 18, the most since the period ended Sept.
21, and now stand at 31,681. On Jan. 11, bets the real would
fall outnumbered wagers the currency would gain by 5,139, the
most in six months, data from BM&FBovespa SA in Sao Paulo show.
The rebound in foreigners' confidence in the real indicates
Finance Minister Guido Mantega may struggle to stem the
currency's two-year rally as central bank President Alexandre
Tombini raises interest rates to curb inflation amid the fastest
economic expansion in two decades. Yesterday's 50 basis-point
increase in the overnight rate to 11.25 percent bolsters the
yield advantage investors get in buying debt in Brazil, which
has the highest inflation-adjusted rates among G-20 nations.
"The central bank and the government have different
objectives," Paul Biszko, an emerging-market strategist at
Royal Bank of Canada in Toronto, said in a telephone interview.
"They are in a difficult situation. Brazil is still flooded
with diversified capital inflows. All they can do is slow the
pace of the appreciation."
The real has climbed for six of the past seven days and
strengthened 39 percent since the beginning of 2008 against the
U.S. dollar, the most among the 16 major currencies after the
Australian dollar. The extra yield investors demand to own
Brazilian government bonds instead of U.S. Treasuries rose 8
basis points to 175 yesterday, according to JPMorgan Chase & Co.
Exporters' Profits
The currency's surge is cutting into exporters' profits by
making their goods more expensive in dollar terms and helping
push the country's annual current-account deficit to a record
$49 billion.
In a bid to brake the rally, Mantega tripled the tax on
foreigners' purchases of fixed-income securities in October,
imposed reserve requirements on short dollar positions last
month and authorized the country's sovereign wealth fund to buy
dollars in the futures market this month.
Last week, the central bank made bets against the real in
the futures market by auctioning off $1 billion worth of reverse
currency swaps. Mantega told reporters on Jan. 14 that he'd take
more measures if needed.
None of the measures so far are sufficient to weaken the
real, said Roberto Melzi, a strategist at Barclays Capital in
New York.
'Massive' Inflows
"Flows coming in are massive," Melzi said. "Generally
speaking there is a limit to what" can be done, he said.
Investors have piled into Brazil in search of higher
returns amid near-zero rates in the U.S., Japan and European
Union. Foreigners poured a record $62 billion into Brazilian
debt and stocks in the first 11 months of last year, up from $46
billion in 2009, according to the central bank.
Tombini, in his first policy meeting as head of the central
bank, raised the benchmark rate to 11.25 percent yesterday from
10.75 percent, in line with the median forecast in a Bloomberg
survey of 51 economists. Yields on interest-rate futures
contracts show traders expect the bank to raise the rate an
additional 200 basis points to 13.25 percent by year-end,
according to data compiled by Bloomberg. On Jan. 3, the
contracts signaled a year-end rate of 12.75 percent.
Investor expectations for consumer price increases over the
next two years, implied by the yield gap between Brazil's
inflation-linked and fixed-rate bonds, rose to 6.5 percent on
Jan. 17, the highest since November 2008. Annual inflation was
5.9 percent in December, exceeding the government target of 4.5
percent.
Bullish Bets
Bullish bets outnumbered wagers the currency would fall by
as many as 221,615 on Oct. 15, three days before Mantega raised
a tax on foreign capital inflows for a second time that month.
Other emerging market countries have also moved to limit
currency gains. Chile's central bank has a $12 billion plan to
buy dollars in the spot currency market, while South Korea and
Taiwan last month tightened capital controls to help stem
inflows of funds from abroad.
Analysts surveyed by Bloomberg predict the real will fall
to 1.69 per dollar by the end of June from 1.6705 yesterday,
according to the median of 13 forecasts.
A combination of a stronger dollar and further measures by
Brazil will cause the real to decline by the second quarter,
said David Beker, chief Latin America strategist at Bank of
America Corp. in New York.
Bearish Forecast
"We are convinced that the government is not comfortable
with the currency where it is," Beker said in a telephone
interview. "This indicates a likelihood of further measures"
to weaken the real. Bank of America expects the real depreciate
to 1.80 by the second quarter, the most bearish of the forecasts
compiled by Bloomberg along with Standard Chartered.
The cost of protecting Brazilian bonds against default for
five years climbed three basis points yesterday to 110,
according to data provider CMA. Credit-default swaps pay the
buyer face value in exchange for the underlying securities or
the cash equivalent should a government or company fail to
comply with debt agreements.
Petroleo Brasileiro SA, the state-controlled energy
producer, said yesterday it plans to sell bonds overseas in what
may be its only benchmark international debt sale this year to
help finance a five-year, $224 billion investment program.
The yield on Brazil's interest-rate futures contract due in
January 2012 rose one basis point to 12.42 percent.
Efforts by the government to stem currency gains will be
ineffective, said Kevin Daly, who helps manage $6 billion at
Aberdeen Asset Management in London.
"A lot of that pressure on the currency is still there,"
he said in an interview. "We don't see any catalyst in the
short term for any sharp selloff in the real.
For Related News and Information:
Brazil Credit Market Stories: NI BZCREDIT <GO>
Top Emerging-Market News: TOP EM <GO>
Most-Read News on Brazil: MNI BRAZIL <GO>
Bloomberg News in Portuguese: NH PBN <GO>
--Editors: Brendan Walsh, David Papadopoulos
To contact the reporters on this story:
Boris Korby in New York at +1-212-617-1073 or
bkorby1@bloomberg.net;
Ye Xie in New York at +1-212-617-2768 or
yxie6@bloomberg.net;
To contact the editor responsible for this story:
David Papadopoulos at +1-212-617-5105 or
papadopoulos@bloomberg.net
2011-01-20 02:39:30.689 GMT
By Boris Korby and Ye Xie
Jan. 20 (Bloomberg) -- International investors are building
bullish bets on Brazil's real at the fastest pace in four months
as the central bank begins raising benchmark rates after a six-
month pause.
Wagers the currency will rise increased by a net 36,820 in
the week through Jan. 18, the most since the period ended Sept.
21, and now stand at 31,681. On Jan. 11, bets the real would
fall outnumbered wagers the currency would gain by 5,139, the
most in six months, data from BM&FBovespa SA in Sao Paulo show.
The rebound in foreigners' confidence in the real indicates
Finance Minister Guido Mantega may struggle to stem the
currency's two-year rally as central bank President Alexandre
Tombini raises interest rates to curb inflation amid the fastest
economic expansion in two decades. Yesterday's 50 basis-point
increase in the overnight rate to 11.25 percent bolsters the
yield advantage investors get in buying debt in Brazil, which
has the highest inflation-adjusted rates among G-20 nations.
"The central bank and the government have different
objectives," Paul Biszko, an emerging-market strategist at
Royal Bank of Canada in Toronto, said in a telephone interview.
"They are in a difficult situation. Brazil is still flooded
with diversified capital inflows. All they can do is slow the
pace of the appreciation."
The real has climbed for six of the past seven days and
strengthened 39 percent since the beginning of 2008 against the
U.S. dollar, the most among the 16 major currencies after the
Australian dollar. The extra yield investors demand to own
Brazilian government bonds instead of U.S. Treasuries rose 8
basis points to 175 yesterday, according to JPMorgan Chase & Co.
Exporters' Profits
The currency's surge is cutting into exporters' profits by
making their goods more expensive in dollar terms and helping
push the country's annual current-account deficit to a record
$49 billion.
In a bid to brake the rally, Mantega tripled the tax on
foreigners' purchases of fixed-income securities in October,
imposed reserve requirements on short dollar positions last
month and authorized the country's sovereign wealth fund to buy
dollars in the futures market this month.
Last week, the central bank made bets against the real in
the futures market by auctioning off $1 billion worth of reverse
currency swaps. Mantega told reporters on Jan. 14 that he'd take
more measures if needed.
None of the measures so far are sufficient to weaken the
real, said Roberto Melzi, a strategist at Barclays Capital in
New York.
'Massive' Inflows
"Flows coming in are massive," Melzi said. "Generally
speaking there is a limit to what" can be done, he said.
Investors have piled into Brazil in search of higher
returns amid near-zero rates in the U.S., Japan and European
Union. Foreigners poured a record $62 billion into Brazilian
debt and stocks in the first 11 months of last year, up from $46
billion in 2009, according to the central bank.
Tombini, in his first policy meeting as head of the central
bank, raised the benchmark rate to 11.25 percent yesterday from
10.75 percent, in line with the median forecast in a Bloomberg
survey of 51 economists. Yields on interest-rate futures
contracts show traders expect the bank to raise the rate an
additional 200 basis points to 13.25 percent by year-end,
according to data compiled by Bloomberg. On Jan. 3, the
contracts signaled a year-end rate of 12.75 percent.
Investor expectations for consumer price increases over the
next two years, implied by the yield gap between Brazil's
inflation-linked and fixed-rate bonds, rose to 6.5 percent on
Jan. 17, the highest since November 2008. Annual inflation was
5.9 percent in December, exceeding the government target of 4.5
percent.
Bullish Bets
Bullish bets outnumbered wagers the currency would fall by
as many as 221,615 on Oct. 15, three days before Mantega raised
a tax on foreign capital inflows for a second time that month.
Other emerging market countries have also moved to limit
currency gains. Chile's central bank has a $12 billion plan to
buy dollars in the spot currency market, while South Korea and
Taiwan last month tightened capital controls to help stem
inflows of funds from abroad.
Analysts surveyed by Bloomberg predict the real will fall
to 1.69 per dollar by the end of June from 1.6705 yesterday,
according to the median of 13 forecasts.
A combination of a stronger dollar and further measures by
Brazil will cause the real to decline by the second quarter,
said David Beker, chief Latin America strategist at Bank of
America Corp. in New York.
Bearish Forecast
"We are convinced that the government is not comfortable
with the currency where it is," Beker said in a telephone
interview. "This indicates a likelihood of further measures"
to weaken the real. Bank of America expects the real depreciate
to 1.80 by the second quarter, the most bearish of the forecasts
compiled by Bloomberg along with Standard Chartered.
The cost of protecting Brazilian bonds against default for
five years climbed three basis points yesterday to 110,
according to data provider CMA. Credit-default swaps pay the
buyer face value in exchange for the underlying securities or
the cash equivalent should a government or company fail to
comply with debt agreements.
Petroleo Brasileiro SA, the state-controlled energy
producer, said yesterday it plans to sell bonds overseas in what
may be its only benchmark international debt sale this year to
help finance a five-year, $224 billion investment program.
The yield on Brazil's interest-rate futures contract due in
January 2012 rose one basis point to 12.42 percent.
Efforts by the government to stem currency gains will be
ineffective, said Kevin Daly, who helps manage $6 billion at
Aberdeen Asset Management in London.
"A lot of that pressure on the currency is still there,"
he said in an interview. "We don't see any catalyst in the
short term for any sharp selloff in the real.
For Related News and Information:
Brazil Credit Market Stories: NI BZCREDIT <GO>
Top Emerging-Market News: TOP EM <GO>
Most-Read News on Brazil: MNI BRAZIL <GO>
Bloomberg News in Portuguese: NH PBN <GO>
--Editors: Brendan Walsh, David Papadopoulos
To contact the reporters on this story:
Boris Korby in New York at +1-212-617-1073 or
bkorby1@bloomberg.net;
Ye Xie in New York at +1-212-617-2768 or
yxie6@bloomberg.net;
To contact the editor responsible for this story:
David Papadopoulos at +1-212-617-5105 or
papadopoulos@bloomberg.net
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