Brazil Real Surges Most Since 2009 as CPI Trumps Currency War

(Bloomberg) -- Brazil’s real posted its biggest weekly gain since 2009 on speculation the government is prioritizing efforts to slow inflation over its fight against a stronger currency.

The real advanced 1.5 percent to 1.6070 per dollar at 5:02 p.m. New York time, from 1.6318 yesterday. The real surged 3.4 percent this week, the most since the period ended July 17, 2009, and rose to its strongest since August 2008.

The central bank said March 29 the economic costs are “too high” to cut inflation to its 4.5 percent goal this year from a more than two-year high of 6.13 percent currently. Investors are now speculating the government will shift strategy and allow the real to strengthen as a counterweight to inflation, said Mariano Cirello, who manages 5 billion reais ($3.1 billion) as chief investment officer at Mapfre Investimentos in Sao Paulo.

“Rumors have been circulating that the government abandoned the floor of 1.65 reais, and that now the value would be 1.60 reais” per dollar, Cirello said in a telephone interview today.

Finance Minister Guido Mantega, after saying in September that a global “currency war” is cutting into Brazilian exporters’ profits, has boosted taxes on some investments to stem the real’s advance. This week he slapped a 6 percent levy on international debt sales and loans with an average minimum maturity of up to 360 days, after tripling in October a tax on foreigners’ purchases of fixed-income securities.

Global Economy

Optimism on the prospects for global growth also is boosting demand for developing-world assets, said Felipe Brandao, emerging-markets strategist at ICAP Brasil, the third- largest currency broker on the BM&FBovespa SA exchange. The U.S. economy added more jobs than forecast in March and the unemployment rate unexpectedly declined to a two-year low of 8.8 percent, a report showed today.

“The payroll today came in above expectations and this is favoring risk assets,” Brandao said in a telephone interview.

Yields on Brazil’s interest-rate futures contracts climbed after the country’s industrial production rose more than economists expected in February. The yield on the contract due in January, the most traded today in Sao Paulo, rose 4 basis points, or 0.04 percentage point, to 12.15 percent.

Brazil’s industrial production rose 1.9 percent in February from the month-ago period, the national statistics agency said today in a report distributed in Rio de Janeiro. That compares to a median forecast of 0.9 percent in a Bloomberg survey of 28 analysts.

“Industrial production came in high,” Ures Folchini, vice-president of fixed-income at Banco WestLB do Brasil SA in Sao Paulo, said in a telephone interview. “Everyone is uncomfortable with the level of inflation and activity.”