Brazil’s Real Skyrockets?

(and the GDP too?)

Brazil’s real is set for the biggest gain in the world this month as economic growth accelerates and the central bank prepares to raise benchmark borrowing costs to curb inflation.

The real rose 5.1 percent this month to 1.8038 per dollar as of 12:40 p.m. New York time, from 1.8950 on January 29. The advance, which reverses much of last month’s 7.9 percent plunge, is the largest among all currencies tracked by Bloomberg. The real will gain to 1.72 by year-end, according to the median forecast of analysts surveyed by Bloomberg.

“Brazil is still a solid story, and the real is an attractive currency,” said Vitali Meschoulam, an emerging- market strategist at Morgan Stanley in New York, who forecasts the real will rise to stronger than 1.7 this year. “The economy is the fastest growing in Latin America. It is among the first to raise interest rates and the strong foreign direct investment dynamics hasn’t changed.”

The real advanced as traders raise their bets that policy makers will boost the key borrowing costs from a record low of 8.75 percent as soon as next month to curb inflation. The central bank this week required lenders to deposit an additional 71 billion reais ($39 billion) to withdraw economic stimulus as a broader measure of inflation that includes wholesale prices quickened to the fastest in 19 months.

Interest Rates
Yields on interest rate future contracts due January 2011, the most traded on Sao Paulo’s BM&F exchange, increased two basis points, or 0.02 percentage point to 10.43 percent, up from 10.27 percent on Feb. 19. That rate suggests traders anticipate the central bank will push the benchmark rate to above 12 percent by year-end.

The real earlier rose as much as 1.4 percent to 1.7989, its strongest level since January 20 on a closing basis, as some investors in the currency futures market closed positions betting against the real.

The real’s gain this month pares its losses this year to 3.2 percent. The currency tumbled 8 percent in January in its biggest slump since October 2008 as China, the biggest buyer of Brazilian exports, curbed bank lending to slow the economy.

Goldman Sachs Group Inc. and Bank of America Corp. recommended clients this month buy the real, saying that growth in Latin America’s biggest economy will lure foreign investment.

Foreign Direct Investment
The $1.6 trillion economy will expand 5.5 percent this year, up from 0.5 percent growth last year, according to a central bank survey of about 100 economists published February 22.
Foreign direct investment will jump 73 percent to $45 billion, matching the record in 2008, as the country builds houses, roads and stadiums for the 2014 World Cup soccer games and 2016 Olympics.

Growth indicators suggest “the current account deficit will be easily financed through foreign investment,” said Jose Francisco de Lima Goncalves, chief economist at Banco Fator SA.
Brazil’s credit rating may be reviewed for an increase by Moody’s Investors Service next year if President Luiz Inacio Lula da Silva’s successor continues to improve the country’s debt indicators, the ratings company said yesterday.

Moody’s raised Brazil’s long-term debt rating to Baa3, the lowest investment grade, from Ba1 in September, following similar moves by Standard & Poor’s and Fitch Ratings a year earlier. Moody’s has a positive outlook on the rating.

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