Bloomberg News

Brazil Real Gains to Three-Week High on European Debt Outlook

October 10, 2011

Oct. 10 (Bloomberg) -- Brazil’s real rose to the strongest level in three weeks after French and German leaders pledged to deliver a plan to recapitalize European banks.

The real climbed 0.5 percent to 1.7632 per dollar today, from 1.7715 on Oct. 7. It earlier touched 1.7369, the strongest since Sept. 16.

German Chancellor Angela Merkel and French President Nicolas Sarkozy said yesterday they will deliver a plan to recapitalize European banks and address the Greek debt crisis by the Nov. 3 Group of 20 summit. The Polish zloty, the Hungarian forint and the Czech koruna are among the emerging-market currencies that rallied more than 2 percent today against the dollar. The Standard & Poor GSCI gauge of raw materials increased 2.1 percent.

“The statements by Sarkozy and Merkel were very positive,” Luciano Rostagno, chief strategist at CM Capital Markets Ltd., said in a telephone interview. “The euro and commodities are higher. This favors the real.”

The real has gained 6.6 percent this month, beating all the other 24 major currencies in emerging markets. The real has recouped some of its 15.4 percent losses in September when the deepening debt crisis in the euro zone prompted investors to reduce holdings of emerging market assets.

Brazil’s interest rates are “still high,” favoring the currency, said Fernando Honorato Barbosa, chief economist at Banco Bradesco SA.

Interest Rate

The central bank unexpectedly lowered the benchmark interest rate, known as Selic, a half percentage point to 12 percent on Aug. 31 on concern the slowing global economy would crimp growth in Brazil. The U.S.’s key lending rate is in a range between zero and 0.25 percent.

“Even amid the crisis, Brazil still has good growth and long-term investments are preserved,” Barbosa said in an interview by telephone from Sao Paulo.

Yields on Brazilian interest-rate futures contracts due in January 2013 rose six basis points, or 0.06 percentage point, to 10.49 percent. Futures contracts suggest traders are betting the central bank will lower the benchmark interest rate at least 50 basis points at its Oct. 19 policy meeting, according to data compiled by Bloomberg.

Policy makers will refrain from accelerating the pace of interest-rate cuts because “the communication of the central bank has indicated a moderate adjustment of the Selic rate,” Pedro Henrique Castro, an economist at SPX Resource Management Ltd., which manages 2.3 billion reais ($1.3 billion), said in a telephone interview from Rio de Janeiro.

‘Moderate’ Cuts

Central bank President Alexandre Tombini last week said that “moderate” cuts in rates will help shield the economy from the European debt crisis without compromising the country’s inflation target. Tombini has repeatedly pledged to slow inflation to the bank’s 4.5 percent target by the end of 2012 from 7.31 percent in September.

Economists covering Brazil raised their 2012 inflation forecast for a sixth straight week after commodity prices rose and the central bank signaled it will cut borrowing costs to protect the country from turbulence in world markets.

Consumer prices will rise 5.59 percent next year, according to the median forecast in an Oct. 7 central bank survey of about 100 economists published today, up from a forecast of 5.53 percent the previous week. The economists forecast annual inflation of 6.52 percent this year.

--Editors: Marie-France Han, David Papadopoulos

To contact the reporters on this story: Josue Leonel in Sao Paulo at jleonel@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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