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Brazil Real Weakens to Lowest Level in Four Years

By Tom Murphy

SAO PAULO--The Brazilian real ended active trading Friday at a four-year low, with more losses possible next week as investors re-evaluate the country's economic and investment prospects.

The real exited active trading at BRL2.1480 to the dollar, considerably weaker than the Wednesday close of BRL2.1084. Thursday was a religious holiday with Brazilian financial markets closed.

The Friday value for the real was the lowest since May 2009, a period when Brazil was still suffering direct effects of the global financial crisis.

The real piled up losses Friday despite Brazilian Central Bank intervention. In early afternoon trading, the central bank held a spot auction of foreign exchange swap contracts, selling $876.7 million worth of the contracts.

Typically, the sale of swap contracts helps strengthen the real against the dollar by making more dollar-hedged bonds available to investors. In fact, the auction initially helped strengthen the real slightly against the dollar. However, in later trading, investors once again pushed up the value of the greenback against the Brazilian currency.

"This morning, there were those who said the real could depreciate to BRL2.20 against the dollar by the end of the year," said Mauriciano Cavalcanti, a trader at Sao Paulo's Ouro Minas brokerage. "Now, I would say we're going to reach BRL2.20 a lot sooner than that."

There are many reasons for the real's weakness.

"One reason is the fact that the U.S. dollar has been gaining against currencies world-wide," said Joao Paulo Correa, foreign exchange manager at the southern Brazilian brokerage of Correparti. "The Brazilian real is no exception to that trend."

Although economists differ on the timing, few disagree with the idea that the U.S. Federal Reserve will have to reverse its long-standing policy of monetary loosening. Once that happens, investors may end up flocking to U.S. investments, all but abandoning emerging markets.

That process may have already begun, according to Mr. Cavalcanti. "Next week, we may get a better idea of how that is affecting the Brazilian market," he said.

Because of the intense focus on the Fed, investors in Brazil effectively shrugged off Brazil's own interest rate hike, which was ordered on Wednesday night. The Brazilian Central Bank raised its base rate by a half point to 8.0% as part of a strategy against inflation.

The Brazilian rate hike had no effect on Brazilian foreign exchange trading Friday. However, it did hit hard at Brazilian stocks. In late afternoon trading, the benchmark Ibovespa index was down more than 2.5%, given that higher domestic interest rates will likely cause investors to shift from stocks to fixed-income investments.

Inflation is another of the factors making investors take another, and more skeptical, look at Brazil.

Brazil's inflation rate is currently running at a worrisome 6.5%. But economic growth in the first quarter was unexpectedly low, with the economy expanding only 0.6% against the fourth quarter of 2012, not the more robust 0.9% analysts had expected.

"This is the new strategy," said Paulo Faria-Tavares, managing partner of Sao Paulo's PTX Lending consultants. "Low growth and high interest rates."

Other problems include Brazil's fast-growing current account deficit. The deficit widened in April to a 12-month level of $70 billion, significantly greater than the year-end 2012 level of $54 billion. Simply put, that means more dollars going out than coming in. And the pace of the net outflow is increasing fast.

 

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Source: The Wall Street Journal - http://online.wsj.com/news/articles/SB10001424127887324823804579013112630873326

Last Updated on Monday, 17 March 2014 11:02

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