QE3 Call Has Top Forecaster Predicting Real Rally: Brazil Credit
Standard Chartered Plc, the most- accurate Brazilian real forecaster over the past 18 months, predicts further monetary stimulus by the U.S. central bank will fuel the biggest rally in the currency since 2009.
The real will advance 12 percent this year to 1.65 per dollar from 1.8332 yesterday, said Mike Moran, a currency strategist at the London-based bank. He was the best forecaster over the past six quarters, according to a study of 23 analysts by Bloomberg Rankings. The currency's 11 percent plunge last year trimmed dollar-based returns on local bonds to 3 percent, compared with an average 40 percent over the previous two years, according to JPMorgan Chase & Co.'s GBI-EM index.
The Federal Reserve is likely to introduce a third round of bond purchases, known as quantitative easing, to shore up the U.S. economy, driving up demand for Brazil's commodity exports, according to Standard Chartered and BNP Paribas SA, the third- best real forecaster. The average estimate among the top five forecasters is for the real to gain 6 percent this year to 1.73 per dollar.
"We expect to see conditions for QE3 introduced in the U.S., which is a very bullish development for commodity markets, for emerging-market currencies, as it has been before," Moran, 37, said in an interview from New York. "The emergence of more bullish global expectations later this year will be very supportive for these growth-oriented currencies such as Brazil's real."
Eroding Returns
The currency's slump last year eroded returns on fixed- income assets even as yields on benchmark real-denominated bonds due in 2017 declined 165 basis points, or 1.65 percentage points, since the end of July to 11.3 percent yesterday, according to data compiled by Bloomberg.
All but three emerging-market currencies declined against the dollar in 2011 as the deepening European debt crisis led investors to reduce holdings of developing countries' assets. The Turkish lira and the South African rand dropped more than 18 percent. Local-currency bonds in emerging markets lost 1.8 percent in 2011, according to JPMorgan's GBI-EM Global Diversified index.
Brazil's real will lead the rebound in emerging markets this year, gaining 7.8 percent to 1.7 per dollar, followed by the Mexican peso and the Turkish lira, according to the median forecast of analysts surveyed by Bloomberg. Only the Hong Kong dollar and the Argentine peso are forecast to decline against the dollar in 2012.
'Downside Risks'
The Fed bought $2.3 trillion of Treasury and mortgage- related bonds from 2008 through June 2011 in two rounds of quantitative easing to support the economy. The real gained 48 percent during that period and the UBS Bloomberg Constant Maturity Commodity Index of 27 raw materials surged 61 percent. Commodity exports made up 11 percent of Brazil's GDP in 2010, according to the national statistics agency.
While the U.S. economy is showing signs of rebounding after the unemployment rate fell to a 34-month low, Fed officials reiterated after their Dec. 13 meeting that the "strains in global financial markets" continue to pose "significant downside risks" to the economy. Chicago Fed President Charles Evans argued that additional easing is warranted to keep the economy growing.
'Helicopter' Fed
Federal Reserve Bank of Atlanta President Dennis Lockhart said in a speech yesterday that he sees the economy improving this year as he withholds judgment on whether the central bank should increase accommodation. New York Fed President William C. Dudley said last week that "additional housing policy interventions" can help boost growth, and the Fed should consider further easing. The Fed next meets Jan. 24-25.
Brazil's Finance Minister Guido Mantega said November 2010 that the Fed's quantitative easing is like throwing money "from a helicopter." Mantega said in July that his government had to impose a tax on some currency derivatives to weaken the real from a 12-year high as the dollar was "melting."
pick-up in Brazil's economy will prompt the central bank to begin raising interest rates by year-end to contain inflation, boosting the appeal of fixed-income assets and adding to gains in the real, said Diego Donadio, a Latin America strategist at BNP in Sao Paulo.
The economy will expand 3.3 percent in 2012, after growing an estimated 2.9 percent last year, according to the median forecast of about 100 economists surveyed by the central bank. The U.S. will grow 2.1 percent this year, following a 1.8 percent growth rate in 2011, according to economists surveyed by Bloomberg.
Rate Cuts
Brazilian policy makers cut the benchmark Selic rate 150 basis points since August to 11 percent, reduced taxes and loosened bank lending requirements to shore up growth. Real- denominated bonds due in 2017 yield 10.4 percentage points more than similar-maturity U.S. Treasuries, compared with 9.9 percentage points on Nov. 29, according to data compiled by Bloomberg.
"By year-end, talks about hiking rates in Brazil will start to pop up," Donadio said in a telephone interview. "That will also help the real."
Donadio, who expects the currency to strengthen 12 percent to rally to 1.64 per dollar by year-end, was the third-most accurate forecaster in the Bloomberg survey.
Vladimir Caramaschi, chief economist of Credit Agricole's Brazilian unit, said gains in the real will be limited as Brazil's current-account deficit widens and major central banks tighten liquidity later in the year. The current-account deficit, the broadest measure of trade and services, will swell to 2.9 percent of gross domestic product this year from 2.1 percent in 2011, according to a Bloomberg survey.
'Grow Again'
"Brazil will start to grow again in the second half of the year and this will lead to a rise in the current-account deficit," Caramaschi said in an interview in Sao Paulo. "At some point, monetary policies in the developed economies will normalize. Both developments will limit the currency gain."
The extra yield investors demand to hold Brazilian dollar bonds instead of U.S. Treasuries fell eight basis points to 213 at 9:31 a.m. in New York, according to JPMorgan Chase & Co.
The yield on the interest rate futures contract maturing in January 2013 dropped four basis points to 10 percent.
The real rose 1.6 percent to 1.8040 per dollar.
Default Swaps
The cost of protecting Brazilian bonds against default for five years rose two basis points yesterday to 161 yesterday, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
President Dilma Rousseff's administration estimates the real will strengthen beyond 1.80 per dollar this year, a government official with knowledge of internal discussions on the issue said yesterday. The government expects the euro region to start recovering in the second half of 2012, which will help weaken the dollar against other currencies, said the official, who asked not to be identified because the government doesn't officially forecast currency moves.
Bloomberg's rankings are based on analysts' quarterly forecasts since September 2010 and one annual estimate made in December 2010. The average deviation of Standard Chartered's forecast from the actual exchange-rate was 6.9 percent. Credit Suisse Group AG ranked second, with a deviation of 7 percent, followed by BNP, Credit Agricole SA and JPMorgan.
The real will also benefit as the European Central Bank adopts a policy similar to quantitative easing, buying the bonds of Italy and Spain to contain the region's debt crisis, Standard Chartered's Moran said.
"A very accommodative monetary policy from global central banks will drive liquidity again back towards Brazil," Moran said.
--With assistance from Wei Lu and Mary Lowengard in New York. Editors: Lester Pimentel, David Papadopoulos
To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net
To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net
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