Brazil's real due a rally against dollar

Neal Kimberley

Published — Sunday 2 December 2012

Last update 1 December 2012 10:55 pm

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LONDON: The Brazilian real could be due a change in fortune against the dollar after its lengthy slide from 1.7067 on Feb 29 to last week's close at 2.0980.
After the real weakened past what is considered to be the limit of an informal 2.0-2.10 per dollar trading band recently enforced by the central bank, Treasury chief Arno Augustin said the exchange rate was at a level closer to what is best for the local economy.
While that signifies the Brazilian government favors a weak real to help boost Brazil's lagging industrial sector, it might also signify that Augustin feels the local currency's depreciation may have gone as far as it should.
Therein lies the risk for traders.
Brazil's central bank notably ended a year of aggressive interest rate cuts on Wednesday leaving its benchmark rate unchanged at a record low but still eye-catching 7.25 percent.
The central bank's decision was predicated on the fact that the current interest rate would help contain inflation pressures that saw price rises quicken to 5.64 percent in the month to mid-November up from 5.56 percent one month before.
If the central bank is showing more concern about inflation worries than about Brazil's uneven economic recovery, the market may construe that to mean the authorities feel the slide in the real has gone far enough.
A weak real encourages import price inflation by making imported goods more expensive in local currency terms.
It is also possible that data due on Friday will show Brazil's economy expanded in the third quarter at its fastest pace in more than two years, as forecast in a Reuters poll of economists. If so, that could ignite some speculative demand for the Brazilian real.
Even if the data, due at 1100 GMT, is "nothing spectacular", as Finance Minister Guido Mantega said, the government is preparing to unveil more stimulus measures, including tax breaks.
Brazil's 7.25 percent yield is beguiling, but perhaps of greater interest are possible intimations that Brazil's policymakers may feel the real has weakened far enough.
Traders may feel a move lower in the dollar/real exchange rate back towards the 100-day moving average, currently 2.0367, might be in the offing.
— Neal Kimberley is an FX
market analyst for Reuters. The opinions expressed are his own.

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