Brazilian real: the new Telfon kid?

Fast FT
 
by: Pan Kwan Yuk
Should the Brazilian real be renamed the Teflon real? After all, nothing bearish seems to stick to the LatAm currency these days.
Even as the stocks and currencies of other emerging and developed markets tumbled in the wake of the UK’s shock vote to leave the EU, the real has proved surprisingly resilient.
It recouped all its post-Brexit losses yesterday and is now at an 11-month high of 3.2323 against the dollar after climbing another 2.2 per cent on Wednesday.
Nevermind the fact that Latin America’s biggest economy is still in the midst of its steepest recession on record, or that the country’s politicians and businessmen continued to be ensnared in the Petrobras corruption scandal.
Year-to-date, the real is now up an eye-popping 22 per cent, easily making it the world’s best performing major currency.
So what is driving currency investors’ current love affair with the real?
Well, to begin with, the currency did take a battering last year, losing a third of its value against the greenback and making it ripe for a bounce back.
It found its catalyst at the start of the year from the political sphere – with the suspension of Dilma Rousseff from office fuelling hope in the market that the arrival of a new government led by interim president Michel Temer will enact the reforms needed to put the economy back on track.
A recent run of encouraging economic data – including a rebound in industrial production and retail sales – seems to support the growing view among economists that the worst could be over in Brazil.
“Economic vulnerabilities are starting to ease,” said analysts at Capital Economics. “The current account deficit has narrowed sharply and stood at just 1.7% of GDP in May. Meanwhile, having increased last month, data covering the first half of June suggest that inflation is likely to resume its downward trend this month.”
Investors are also taking a fresh look at the Brazilian real amid the plunge in haven bond yields caused by the Brexit vote.
With the markets no longer pricing a US rate hike this year and expectations growing that developed economies will unleash a wave of monetary stimulus to shield their economies from a Brexit fallout, Brazil’s high interest rates (the benchmark Selic rate currently sits at 14.25 per cent) are drawing the attention of yield hungry fund managers once again.
Brazil’s high interest rates also makes it harder for traders to short the currency, says Mike Moran, head of Americas Macro research at Standard Chartered Bank in New York.
Shorting the BRL is an expensive strategy and may be enough of a deterrent to keep possible BRL losses in check (relative to others)
Of course, what the markets give with one hand can easily be taken with the other. The real can quickly find itself on the backfoot again should commodity prices – which has stablised in recent weeks – take another leg down or if the Fed moves the timing of its rate hike forward again. For now though, real bulls can enjoy their day in the sun.
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