Brazil Curbs Won’t Stop Real Rally as Gain Curbs Inflation, Barclays Says

Brazil’s real strengthened beyond 1.60 per dollar for the first time since 2008 after Barclays Capital said Finance Minister Guido Mantega may tolerate currency gains that help control inflation.

The currency will likely trade at 1.50 to 1.60 per dollar, Barclays wrote in a report dated April 6, revising its earlier outlook for 1.65 to 1.75 reais per dollar. The real gained 1 percent after the report to 1.5990 as of 8:15 a.m. in New York.

Mantega yesterday told reporters that, while he can deploy measures to curb gains in the real, the currency’s appreciation was “inevitable” to some extent because of the economy’s strength. He announced companies will have to pay a 6 percent tax starting today on foreign loans with maturities of up to two years, the government’s third attempt in two weeks to stem the currency rally that is hurting manufacturers.

“We are skeptical that these new measures will contain the recent trend of the real’s appreciation,” Baclays economists Marcelo Salomon in New York and Guilherme Loureiro in Sao Paulo wrote in the report. “Moreover, we believe the government is now willing to accept a stronger real to help fight inflation.”

Yields on Brazilian interest-rate futures contracts due in January climbed for a third day yesterday as investors raised bets higher borrowing costs will be needed to cool the fastest inflation in more than two years. The so-called Selic rate will probably rise to 12.25 percent by yearend from 11.75 percent as inflation is expected to reach 6.02 percent, according to median estimates in an April 1 central bank survey of economists.

‘Important Change’
“We interpreted Finance Minister Mantega’s press conference as a very important change in view,” Barclays wrote. “We take this as an indication that while the government will continue to impose constraints on the real’s carry trades, it believes there is little it can do to fight the global weakness of the dollar and the attractiveness of flows into Brazil.”

Latin America’s biggest economy expanded 7.5 percent last year, the most in over two decades. Brazil’s benchmark interest rate compares with near zero rates in the U.S. and Japan, drawing foreign capital to the country and boosting the real by 43 percent since the end of 2008.