Brazil Carry-Trade Flows to Climb, StanChart Says

Jan. 7 (Bloomberg) -- Carry-trade investment flows into Brazil will climb this year as traders tap into central bank rate increases that will likely send benchmark borrowing costs above 10 percent, according to Standard Chartered Plc.

Carry trades, in which investors buy higher-yielding assets with money borrowed in nations with lower rates, will pick up as Brazil lifts the overnight interbank target from a record low of 8.75 percent to stem inflation as the economy rebounds, said Mike Moran, a senior currency strategist at Standard Chartered.

Moran, one of the most accurate forecasters in a Bloomberg survey of the real’s world-beating rally last year, predicts these flows will help the real advance to an 11-year high of 1.55 per dollar by year-end. That contrasts with the 1.75-per- dollar year-end call from BNP Paribas SA, the best Brazil real predictor last year among forecasts made at the end of 2008.

“We see stronger growth and higher rates boosting carry trades,” Moran said in a telephone interview from New York.


The Brazilian currency lost 0.6 percent to 1.7415 per dollar, at 10:33 a.m. New York time, from 1.7310 yesterday.

The real surged 33 percent last year, more than all other major currencies tracked by Bloomberg, as Latin America’s biggest economy was one of the first to recover from the global recession. In January 2009, when the real traded as weak as 2.3996, Standard Chartered forecast it would end the year at 1.9 per dollar. The median year-end forecast at the time in the Bloomberg survey was 2.24 per dollar.

Rising Rates

Standard Chartered’s 11.5 percent benchmark interest-rate forecast for the end of this year is the highest in a Bloomberg survey of 13 banks. The median estimate is 10.5 percent.

Brazilian traders expect the central bank to boost the rate more. Policy makers will raise it to about 12.7 percent by December, according to interest-rate futures data compiled by Bloomberg.

Those rates will lure carry-trade investors, Moran said.

By comparison, U.S. traders’ expect the Federal Reserve to raise its benchmark rate to no higher than 1.25 percent by year- end from today’s target range of zero to 0.25 percent, according to interest-rate future contracts on the Chicago Board of Trade.

To contact the reporter on this story:
Camila Fontana in Sao Paulo at cfontana@bloomberg.net
Last Updated: January 7, 2010 10:41 EST
Brazil Carry-Trade Flows to Climb, StanChart Says