Brazil to Keep Real Near 1.7 Per Dollar: Week Ahead

Brazil will keep the world’s best- performing major currency near 1.7 reais per dollar through year-end by signaling it may step up measures to slow foreign investment, said RBC Capital Markets and BNP Paribas.

Investors are “cautious” after the government imposed a 2 percent tax on foreigners’ stock and bond purchases on Oct. 19 to stem the capital flows that helped send the real to a 33 percent gain this year, said Nick Chamie, head of emerging- market research at RBC. The real has dropped 1.4 percent since then to 1.7427 per dollar at 7:17 a.m. in New York, the second- worst performance among the six most-traded Latin American currencies, in part on concern the government will try more measures.

“The real wild card is the policy outlook for government efforts to slow the appreciation,” Chamie said in a telephone interview from Toronto. He predicts the real will end the year at 1.73. “December will be a tug of war” between the government and investors, he said.

President Luiz Inacio Lula da Silva is seeking to cap the real’s surge in a bid to protect exporters’ profit margins and bolster the recovery in Latin America’s biggest economy. Finance Minister Guido Mantega said Nov. 5 the foreigners’ tax will also help prevent an asset “bubble” in the country. He said Nov. 17 that he won’t allow companies’ competitiveness in overseas markets to be hurt by the currency rally.

Spokespeople at the Finance Ministry and central bank declined to comment on the possibility of new measures.

‘Past Its Peak’

This “political noise” has made the currency “no longer attractive,” Alexandre Lintz, chief Brazil strategist at BNP Paribas, France’s largest bank, said in a phone interview from Sao Paulo. “The real is past its peak,” he said.

Lintz predicts it will hold at about 1.7 through year-end and slide toward 1.9 by the second quarter. His year-end forecast is in line with the median estimate of 1.71 in a Bloomberg survey of 19 economists.

Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, said last week that the real is the “most overvalued” currency as a “wall of money” coming into the country may overwhelm efforts to curb its rally.

“After some initial success with capital controls, real appreciation appears to be on the rise again,” Thomas Stolper, a London-based economist with Goldman, wrote in a report.

Second-Biggest Inflow

The real touched a 14-month high 1.6968 on Nov. 10, leaving it within 8 percent of a decade high reached in August 2008, as the global recovery spurred demand for the country’s commodity exports and investors poured money into its stock and bond markets.

Brazil had a net foreign inflow from trade and investment of $14.6 billion in October, buoyed by a record $8.1 billion initial public offering by the local unit of Banco Santander SA. The inflow was the second biggest since the central bank began tracking the data in 1982. Only June 2007 posted a bigger figure — $16.6 billion.

The trade surplus will fall to $588 million in November from $1.33 billion in October, according to the median estimate in a Bloomberg survey of 18 economists. The Trade Ministry is scheduled to release the figures tomorrow morning.

JPMorgan Chase & Co., the second-largest U.S. bank, said the capital inflows will help fuel more currency gains. The real will climb to 1.6 by June, a stronger forecast than its previous 1.7 call, Julio Callegari, JPMorgan’s Brazil economist, said last week. The country’s “above-trend growth” and interest-rate increases forecast for the first half of 2010 will lure investment, Callegari said in a report.

Economic Growth

Brazil’s gross domestic product will shrink 0.7 percent this year before expanding 3.5 percent in 2010 while the region’s other major economies contract 2.7 percent this year and grow 3 percent next year, according to International Monetary Fund forecasts. The central bank will begin raising the benchmark lending rate from a record low of 8.75 percent in the first quarter, according to the futures market for interbank rates, known as CDI.

The Bovespa stock index surged 79 percent this year, the biggest gain since a 97 percent rally in 2003.

On Nov. 18 the government said it would begin taxing the issuance of depositary receipts in international markets in a bid to prevent companies from selling shares abroad rather than locally. The move will “balance” out distortions caused by the 2 percent tax that was imposed Oct. 19 on foreign investment, Economic Policy Secretary Nelson Barbosa said.

‘Heavy Hand’

The government won’t let the real strengthen beyond 1.7 per dollar for more than a few days at a time over the next six months, said Pedro Tuesta, senior economist for Latin America at 4CAST Inc. He said Finance Ministry “chatter” picks up every time the real approaches 1.7 per dollar. Dubai’s effort to delay state companies’ debt payments may make it easier for Brazil to keep the real in check by cutting into demand for higher- yielding, emerging-market assets, Tuesta said.

“Traders don’t want to test Mantega,” Tuesta said in a telephone interview from Washington. “There is no doubt they can do anything and use a heavy hand.”

The real fell 0.5 percent last week closing at 1.7408 per dollar, from 1.7314 on Nov. 20.

In the overnight interest-rate futures market, the yield on the contract due January 2011 advanced 13 basis points, or 0.13 percentage point, to 10.29 percent.

The benchmark Bovespa stock index gained 1.1 percent last week to 67,082.15 points.

The following is a list of events in Brazil this week:

Event                                             Date
PMI Manufacturing (Nov.)                          Dec. 1
Trade Balance (Nov.)                              Dec. 1
Fipe CPI (Nov.)                                   Dec. 2
Vehicle Sales (Nov.)                              Dec. 4
Vehicle Exports (Nov.)                            Dec. 4
Vehicle Production (Nov.)                         Dec. 4