{"id":1589,"date":"2018-04-20T13:23:35","date_gmt":"2018-04-20T13:23:35","guid":{"rendered":"http:\/\/baileyonlineclassroom.com\/theamericasblog\/?p=1589"},"modified":"2018-04-20T13:23:35","modified_gmt":"2018-04-20T13:23:35","slug":"brazils-weaker-currency-suggests-fading-of-carry-trade-appeal","status":"publish","type":"post","link":"https:\/\/baileyonlineclassroom.com\/theamericasblog\/2018\/04\/20\/brazils-weaker-currency-suggests-fading-of-carry-trade-appeal\/","title":{"rendered":"Brazil\u2019s weaker currency suggests fading of carry trade appeal"},"content":{"rendered":"

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When Brazil\u2019s populist former president\u00a0Luiz In\u00e1cio Lula da Silva was jailed for corruption this month, markets were expected to cheer the end of the leftist leader`s comeback hopes in elections this year. But instead of rallying, Brazil\u2019s currency, the real, headed in the\u00a0opposite direction,\u00a0breaking out of its previous range of R$3.20 to R$3.30 to the dollar and touching some of its weakest levels since 2016 of above R$3.40.\u00a0 While politics was the catalyst for the sudden slide, the weakening of the real has been coming for some time as part of what UBS is calling the\u00a0\u201cGreat Unwind\u201d \u2014 a mixture of the end of a carry trade in the currency combined with the liquidation by the central bank of billions of dollars of swaps that were used by investors for hedging.<\/p>\n

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\u201cThe theme of a weak real is getting a lot of attention now because we broke out of that range, but the truth of the matter is it\u2019s been kind of weak for quite some time,\u201d said Tony Volpon, economist with UBS. Brazil has been among the best-performing emerging markets over the past year, led by equities but with a relatively stable real providing a backstop.\u00a0 Share this graphic The stock and currency markets languished in 2015 under Mr Lula da Silva\u2019s anointed successor, former president Dilma Rousseff, before surging on her impeachment and replacement with her more business-friendly vice-president Michel Temer in 2016.\u00a0 Mr Temer\u2019s economic team pushed consumer price rises down to two-decade lows with\u00a0inflation at 2.68 per cent by end-March against a year earlier. This has allowed for record-low interest rates.\u00a0 The Ibovespa, the benchmark equities index, has more than doubled from its lows in January 2016, over the past year alone returning 30.7 per cent. The real, after reaching levels of more than R$4 to the dollar during the Rousseff years, was trading at R$3.20 to R$3.30 for much of the past year before its sudden depreciation in the past two weeks.\u00a0 Mr Volpon argues that the outperformance of the Ibovespa compared with the real suggests that factors other than economic fundamentals are behind the currency\u2019s weakness.\u00a0 Share this graphic The most obvious is the central bank\u2019s longer than expected easing cycle with short and long-term bond yields in Brazil falling steadily compared with the US. Brazil\u2019s central bank has cut the benchmark Selic rate from 14.25 per cent in October 2016 to 6.5 per cent in March. Another cut is expected at the next meeting in mid-May This comes as the US is tightening monetary policy, further reducing the attractiveness of the real as one of the world\u2019s great carry trade currencies. But Mr Volpon argues that the currency\u2019s weakness has been exacerbated by the Great Unwind. During the Rousseff presidency, the\u00a0central bank sold $114bn in currency swaps to help smooth volatility in the real, driven by domestic political uncertainty and doubts over US monetary policy. Under the swaps, the central bank committed to compensate counterparties for any fall in the real against the dollar in return for receiving interest payments at the Selic rate. The swaps provided a hedge for investors buying Brazilian real-denominated assets to take advantage of the carry trade.\u00a0 However, since 2016, the central bank has been reducing its stock of swaps because of lower market volatility. These totalled almost $24bn by the end of 2017. Without the swaps to act as a hedge, foreign investors have been reducing their exposure to the Brazilian carry trade even more, Mr Volpon said, in the process weakening the real.<\/p>\n

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While Brazil\u2019s fundamentals, such as its terms of trade, should justify a stronger currency, for now policymakers would likely welcome the boost to exports from the lacklustre real, Mr Volpon said.\u00a0 \u201cI think a weaker currency is not a bad thing when your growth is still low,\u201d he added.\u00a0 Others argue that the real\u2019s weakness was likely to also be part of a \u201crisk off\u201d trend as investors fret the world is braced for the return of inflation and higher interest rates, which could tip developed markets into recession. \u201cIt\u2019s not a Brazilian thing,\u201d said Walter Molano, at BCP Securities, of the weakness affecting the real.\u00a0 In the meantime, the currency is likely to be buffeted by the October election. Polling at the weekend showed that jailing Mr Lula da Silva, who had been leading in the polls, had put extreme-right former army captain, Jair Bolsonaro, in the lead, followed by environmentalist Marina Silva and former chief justice Joaquim Barbosa. All of them face question marks over their ability to manage Latin America\u2019s biggest economy or to continue with reforms started by Mr Temer.\u00a0 The economy is expected to expand 2.5 per cent this year and 2.8 per cent next year, according to estimates from FocusEconomics.\u00a0 \u201cA market-friendly outcome from October\u2019s elections is\u2009.\u2009.\u2009.\u2009critical to supporting the economy\u2019s outlook,\u201d FocusEconomics economist Angela Bouzanis wrote in a note.<\/p>\n","protected":false},"excerpt":{"rendered":"

Please use the sharing tools found via the email icon at the top of articles. Copying articles to share with others is a breach ofFT.comT&Csand Copyright Policy. Email licensing@ft.comto buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found here. https:\/\/www.ft.com\/content\/fe87df74-430c-11e8-803a-295c97e6fd0b When Brazil\u2019s populist former president\u00a0Luiz… Read more »<\/a><\/p>\n","protected":false},"author":47,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1589","post","type-post","status-publish","format-standard","hentry","category-article"],"_links":{"self":[{"href":"https:\/\/baileyonlineclassroom.com\/theamericasblog\/wp-json\/wp\/v2\/posts\/1589","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/baileyonlineclassroom.com\/theamericasblog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/baileyonlineclassroom.com\/theamericasblog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/baileyonlineclassroom.com\/theamericasblog\/wp-json\/wp\/v2\/users\/47"}],"replies":[{"embeddable":true,"href":"https:\/\/baileyonlineclassroom.com\/theamericasblog\/wp-json\/wp\/v2\/comments?post=1589"}],"version-history":[{"count":1,"href":"https:\/\/baileyonlineclassroom.com\/theamericasblog\/wp-json\/wp\/v2\/posts\/1589\/revisions"}],"predecessor-version":[{"id":1590,"href":"https:\/\/baileyonlineclassroom.com\/theamericasblog\/wp-json\/wp\/v2\/posts\/1589\/revisions\/1590"}],"wp:attachment":[{"href":"https:\/\/baileyonlineclassroom.com\/theamericasblog\/wp-json\/wp\/v2\/media?parent=1589"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/baileyonlineclassroom.com\/theamericasblog\/wp-json\/wp\/v2\/categories?post=1589"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/baileyonlineclassroom.com\/theamericasblog\/wp-json\/wp\/v2\/tags?post=1589"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}