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Although geopolitical tensions have increased in recent days, given the escalation of the conflict between Russia and Ukraine, the positive dynamics of the real have been striking. With the high spread interest rate between Brazil and the foreign market and the expressive inflow of foreign capital into the domestic stock market, the foreign exchange rate left the level of R$5.71 to the dollar seen at the beginning of January and ended Tuesday being at R$5.0511, the lowest since July 1, 2021.
The move has surprised market analysts and, even after the recent appreciation of the real against the dollar, managers maintain a constructive view and see potential for further appreciation of the Brazilian currency.
Year-to-date, the dollar has dropped 9.39% against the real, in a much more intense movement than that observed in other emerging markets. Also this year, the greenback is down 0.95% in relation to the Mexican peso; dropped 5.45% in comparison with the South African rand; is down 3.34% against the Colombian peso; and shows a decline of 6.96% against the Chilean peso.
Analysts have maintained a constructive bias towards the real in the short term, although they point to a more adverse environment when looking at the coming months. This is the case of the French bank Natixis, which on Tuesday, in a report to clients, started to recommend long positions in reais, that is, those that gain from the appreciation of the Brazilian currency in relation to the Colombian peso.
In the view of Natixis’s chief economist for Latin America, Benito Berber, the more aggressive action by the Central Bank, a decrease in the political risk premium in the prices of domestic assets and the inflow of foreign capital to the Brazilian stock market is likely to support a further appreciation of the real.
“We feel that more market participants are feeling more and more comfortable with holding long positions in real,” says Mr. Berber. For him, the movement takes place despite a slowdown in economic activity in Brazil and latent concerns on the fiscal front. In addition, the economist assesses that there is a drop in the political risk premium, which would support the chance of the real to appreciate further.
At AZ Quest, the bias is also constructive with the future performance of the Brazilian currency. “The movement was large and quite relevant, but we believe it is likely to persist,” said Gustavo Menezes, the company’s macro manager, who highlights, in particular, the evolution of the real interest rate, which started from very negative levels in 2021 to a real rate ex -ante between 6% and 7%.
“The interest rate spread has always been a very relevant determinant in the projection of currencies,” he says. Mr. Menezes also notes that, with the change in the inflationary scenario in Brazil and in the world, the real interest rate expected in the future has become more difficult to project. “Last year, we had a very negative real interest rate, even with the Central Bank raising interest rates, and the return of the currency began to be very harmed,” Mr. Menezes notes.
He reveals that, in the second half of 2021, AZ Quest began to adopt more favorable positions to the real due to the expectation that the real interest rate scenario would undergo important changes. “We still have a debate about what the terminal level of the Selic will be, but inflation has become more palpable and, in the projections, varies between 5% and 6%, that is, we will have, 12 months ahead, a projected real interest rate of about 6%. It’s a pretty big change.”
In addition, Mr. Menezes notes that, in the U.S., the Fed has adopted a tougher speech, but has not yet started to tighten its policy, at a time when inflation has been persistent. “The real interest rate spread is what has made the market take this good stride, in addition to the thesis of reversing the flow, with capital leaving the stock exchanges of the developed markets and returning to emerging markets,” he says.
And it is based on this context that ACE Capital also continues with long positions in real, although they have reduced their size. “We don’t think it’s an appreciation because of the improvement in fundamentals, because the fiscal issue still raises a lot of uncertainty. The fact is that there is a flow of foreigners and there are no signs of interruption or reversal in the very short term,” said Daniel Tatsumi, the firm’s head of currency.
In this sense, Mr. Tatsumi states that ACE has a downbeat view of Brazil, but emphasizes that “it is difficult to bet against the real, especially in the context of portfolio rotation and higher interest rates in Brazil.” The manager draws attention to the fact that the real was heavily punished during the pandemic, both by the flight of capital from risk assets and by the low level of the Selic.
“If we look at the whole year, the real is the best currency and, in 12 months, it is among the best. But if we consider a two-year window, the real just shouldn’t be worse than the Turkish lira. It’s a currency that has been hit a lot and, in this reality, it’s not unreasonable to imagine a dollar below R$5 in the short term,” says Mr. Tatsumi.
In the opinion of the currency manager at Greenbay Investimentos, Marcel Yagui, the exchange rate has benefited from the interest rate spread, as the Central Bank made a major adjustment and made Brazil one of the countries that pays the highest interest rates even in relation to its peers. “This adds to the terms of trade issue, which have been very favorable, and makes our currency attractive from a foreigner’s point of view,” he said.
For Mr. Yagui, the very relevant flow that has entered the local stock market “helps in this very impressive effect of appreciating the real very quickly.” He said that Greenbay maintains an upbeat view of the Brazilian currency due to these factors, but points out that, given the speed of the adjustment, the manager chose to reduce long positions in reais against the dollar.
A less constructive view with the real, however, is defended by the partner and CEO of Armor Capital, Alfredo Menezes, for whom there is an undershooting [exaggeration downwards] of the exchange rate due to the flow of foreign capital. “But this flow is not recurrent. It is one-off, so further on we will see the real weaken [against the dollar] again.”
“Can the exchange rate drop below R$5? It can. It would be very brave to say no, given that the spot dollar is at R$5.05, but I think we are very close to the minimum,” he evaluates. Mr. Menezes says that there is a return of funds from Brazilians who were abroad and that foreigners have entered the Brazilian stock market with funds in the midst of a global rotation of portfolios. “But we cannot forget that it will not be these one-off flows that will finance the current account deficit forever.”
Armor Capital turned the month of January with long position in reais, but zeroed it after recent gains. “With the current level, we are slightly long in dollar,” says Mr. Menezes, that is, with a bet that the dollar will gain ground again against the real.
(Igor Sodré contributed to this story.)
Source: Valor International