Brazil Looks 'Real' Attractive: Pro

Brazil Looks 'Real' Attractive: Pro
Chad Ehlers | Stone | Getty Images

Brazil has been pushing to keep its currency in check, but this strategist thinks they may soon take the pressure off.

Brazil's has been battling its currency's strength for a while now. With the country's target lending rate at 7.25%, the real had been drawing considerable interest from investors looking for carry trades, in which they sell a low-yielding currency and buy one from a country where interest rates are higher.

So Brazil has been lowering rates, and Finance Minister Guido Mantega has been blasting easing moves in first-world economies like the U.S. and Europe.

Well, don't look now, but Brazil's easing cycle could soon be ending. At least, that's the view of Mauro Roca, director of emerging markets currency strategy at Deutsche Bank in New York.

The central bank has "already introduced important monetary policy stimulus, and they can now at least pause to see how that is affecting the economy," he told me.

Roca and a colleague, Jose Vieira, also argue in a note to clients that "eventually, potentially as a result of inflationary pressures, it will have to let the currency follow an appreciation path." Brazil's inflation was 5.28% in September - quite robust by U.S. standards - and the strategists argue that "the underlying trend does not leave any room to accommodate any surprises arising from movements in the exchange rate or international prices."

Roca and Vieira recommend selling the dollar against the Brazilian real at current levels as a carry trade.

"We don't expect that the currency will move for some time," Roca told me. In fact, he says, some strategists think the central bank could even cut interest rates another 25 basis points before the easing stops. But the interest rate differential between Brazil and the U.S., combined with low volatility in the dollar-real currency pair, make the trade attractive anyway.

Roca told me he expects inflation indicators to strengthen enough by mid-year that the central bank will start weighing approaches to keep it in check, and he sees an interest rate hike coming around the beginning of 2014.

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