Brazil's currency, the real, is poised to strengthen past the level of 2 per dollar in the next few months as central banks in the United States and Europe deploy another round of massive stimulus measures, a recent Reuters survey showed. Domestically, the economy is also expected to pick up in the coming months, reviving some of the allure of a currency that has lost more than 16 percent since the end of February.
With a stronger economic performance, Brazil will inevitably become a more appealing destination for the hundreds of billions of dollars likely to be injected into the markets by the US Federal Reserve and the European Central Bank, as part of their efforts to boost economic activity.
As dollars flow in, the real will likely break through the lower limit of the informal trading band of 2.0-2.1 per dollar it has been stuck within since the beginning of July, the survey found.
Still, gains should be limited. In one year, the currency could gain around 6 percent toward the level of 1.92 per dollar, according to the median forecast of 29 analysts. In six months time, the real would be trading around 1.96, compared to its current level of around 2.04 per dollar.
It could break through 2 per dollar in the next three months, however, as soon as the Brazilian economy shows signs of life and it becomes more clear which actions the Fed and the ECB will take. "The real's strengthening trend greatly depends on improvements in the external scenario and a recovery in Brazil's economic activity. Both factors will have an impact on capital inflows to Brazil," said Flavio de Andrade, fixed-income strategist with Bank of America Merrill Lynch in New York.
Brazil, which surpassed Britain to become the world's No 6 economy, is expected to rebound in the second half of this year after a dismal performance in the past few quarters, according to another Reuters poll.
"We believe Brazil's industrial production will pick up in the next few months as the lagged impact of an expansionist monetary policy is felt by the end of the year," he said.
He sees the real trading at 1.98 per dollar in one year. Despite its expected gains, the real is likely to remain trapped in a narrow trading range whose lower and upper limits are determined by the government's willingness to support exporters and the central bank's concern about inflation.
Brasilia fears for the competitiveness of domestic industry whenever the real gains too much, with repeated warnings from Finance Minister Guido Mantega about possible measures to weaken the currency.
In the beginning of July the central bank clearly took Mantega's side when Aldo Mendes, the bank's director of monetary policy, said he personally believed a real stronger than 2 per dollar could be harmful to the industrial sector. "It's very clear the government is not comfortable with a real stronger than 2 per dollar. So we will have this hand wrestling until the band is broken," said Andre Perfeito, chief economist at Gradual brokerage in Sao Paulo.
Gradual forecasts the real to gain to 1.90 per dollar by the end of October, but sees it weakening back to the 2-per-dollar level by the end of January.
Inflation pressures stemming from an expected economic recovery and higher commodity prices should force the central bank to accept a slightly stronger currency, analysts argued. Indeed, a stronger real seems to be a more palatable alternative for the government than higher interest rates, which have been reduced to an all-time low of 8 percent in July as part of President Dilma Rousseff's broad campaigning for lower borrowing costs.
"Grains prices are much higher and you're going to get a shock from food prices," said Enrique Alvarez, head of research at IDEAglobal in New York.
"And the government doesn't want to move interest rates higher. The only way to get that is by letting the real appreciate, like Mexico is going to do with the peso," he said.
Comments
Comments are closed.