Brazilian Real Leads Emerging-Market Gains on Fed Rate Outlook

Brazilian Real Leads Emerging-Market Gains on Fed Rate Outlook

By Paula Sambo

10:18 AM BRT
March 23, 2015

(Bloomberg) — Brazil’s real led emerging-market advances on speculation Federal Reserve officials won’t be in a hurry to raise U.S. interest rates, supporting demand for higher-yielding assets.

The real climbed 2 percent to 3.1686 per dollar at 3:54 p.m. in Sao Paulo, the biggest gain among 24 developing-nation currencies tracked by Bloomberg, after declining on March 19 to a 12-year low.

Most of the dollar’s counterparts rose Monday after the Fed said last week that higher borrowing costs are unlikely in April and that it won’t tighten policy until the U.S. central bank is “reasonably confident” inflation will return to target and the labor market improves further. Three-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, was the highest among 16 major currencies.

“The emerging-market relief rally following the cautious Fed outlook signals the beginning of a bullish reversal after heavy losses over the past weeks,” Ipek Ozkardeskaya, a currency strategist at Swissquote Bank in Gland, Switzerland, said in an e-mailed response to questions. “Still, the risk-reward ratio in real holdings is hammered by the high volatilities, and this is the reason why the real could underperform its emerging-market peers.”

The real is still down 16 percent this year as Finance Minister Joaquim Levy faces opposition in Congress to budget measures needed to avoid a credit rating downgrade and allegations of corruption at the state-controlled oil company drew street protests earlier this month.

Pension Legislation

Valor Economico reported that President Dilma Rousseff’s economic team is seeking to block legislation that would increase pension benefits.

Moody’s Investors Service cited a stalled economy and fiscal challenges when it put Brazil on negative outlook in September, six months after Standard & Poor’s cut the nation to one level above junk. Moody’s and Fitch Ratings rank it a step higher.

Economists projected a 0.83 percent decline in gross domestic product for 2015 and raised their forecast for increases in consumer prices to 8.12 percent, according to the median of about 100 estimates in a central bank survey published Monday. The last time inflation ended the year above 8 percent was 2003.

Swap rates on the contract maturing in January 2016, a gauge of expectations for changes in borrowing costs, declined 0.10 percentage point to 13.59 percent.

To support the real and limit import price increases, the central bank sold the equivalent of $97.7 million of currency swaps as part of a plan to offer as much as $100 million a day until at least March 31. It rolled over contracts worth $356.1 million.

Brazil will outline the future of the swaps program in coming weeks, central bank President Alexandre Tombini said at an event in Sao Paulo on March 18.

Last week, the real’s 14-day relative strength index versus the dollar was below 30, a level some traders interpret as a sign that the local currency’s slide may have been overdone.

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