Real’s Drop Quickens as Brazil Growth Slows, Rate Cut Looms

By Jamie McGee and Francisco Marcelino

Dec. 9 (Bloomberg) -- The Brazilian real’s four-month, 36 percent tumble is prompting Brown Brothers Harriman & Co. and Standard Chartered Bank to abandon calls for an early 2009 rebound and predict further declines.

The real may fall as much as 9 percent by year-end to 2.75 per dollar, said Win Thin, a senior currency strategist at New York-based Brown Brothers, which manages $42 billion. Standard Chartered, the U.K. bank that makes most of its profit from emerging markets, revised its first-quarter forecast last week to 2.7 from 2.15.

The best-performing emerging-market currency the previous four years is weakening faster than analysts had forecast as economic growth slows and the global credit crisis dries up demand for debt linked to the nation’s 13.75 percent benchmark interest rate. Recessions in the U.S., Europe and Japan reduced dollar revenue from Brazil’s biggest exports -- commodities such as soybeans, iron ore and sugar.

“I’m shocked; if anyone tells you they weren’t, they are lying,” said Thin, who previously forecast the real at 2.25 by year-end. “I’ve pretty much thrown in the towel. It’s unfortunate. Brazil is a great story.”

The real fell 3.2 percent yesterday to 2.5127 after sinking 5 percent last week as economic reports showed growth is faltering and traders increased bets the central bank will lower interest rates as soon as tomorrow. The real is the worst performer among the 16 most-traded currencies the past four months, according to data compiled by Bloomberg.

Three-per-Dollar

The currency will end the year at 2.27 per dollar and strengthen to 2.2 by the end of 2009, according to the median estimate in a central bank survey of about 100 economists published yesterday. Thin said the currency is unlikely to recover until the second half of 2009 at the earliest, breaking from his previous prediction of a first-quarter turnaround.

“We underappreciated how strong the demand for dollars would be,” said Douglas Smith, chief Americas economist at Standard Chartered in New York, who expects the real to begin rallying as soon as the second quarter as commodities rebound.

A slide in the real to 3 per dollar over the next two months has become “more probable” than a rebound to 2, said Mario Cebrian, head of foreign-exchange trading at Banco Fibra SA in Sao Paulo. The real hasn’t traded at 3-per-dollar in more than four years.

“The economic fundamentals have changed,” Cebrian said.

Recession

Brazil, Latin America’s largest economy, expanded 6.1 percent in the second quarter from the year-earlier period, double the average pace over the previous decade, as record commodity exports fueled an increase in government spending and a consumption boom. The government today may report third-quarter gross domestic product grew 5.8 percent, according to the median estimate of 31 economists surveyed by Bloomberg.

Brazil may be heading toward a recession as the global economic slump deepens, Morgan Stanley said in a report last week. Economic growth will ease to 2.5 percent next year, the slowest pace since 2003, from 5.2 percent in 2008, according to the latest central bank survey.

“The numbers, not just in the U.S., but everywhere, are terrible,” Thin said.

Brazilian industrial output growth slowed to 0.8 percent in October from 9.8 percent in September, government data showed last week. The monthly inflation rate fell to 0.36 percent in November, lower than all 40 forecasts in a Bloomberg survey, as consumer demand weakened.

Commodities Rout

Commodities, which account for about two-thirds of Brazilian exports, plunged for the fourth week in five last week, with the UBS Bloomberg Constant Maturity Commodity Index declining 14 percent to a three-year low. The index rose 4.5 percent yesterday, paring its tumble from a July 2 record high to 52 percent.

The real’s slide has accelerated as traders stepped up bets that the central bank will cut interest rates to shore up growth. The yield on Brazil’s overnight futures contract for January 2010 delivery fell 20 basis points yesterday to 13.12 percent after sinking 1.16 percentage points last week.

The futures rate is at the lowest level since April 4 and is 63 basis points, or 0.63 percentage point, below the central bank’s 13.75 percent overnight rate.

Even after policy makers stemmed the real’s decline on Dec. 5 by buying an undisclosed amount of reais at auctions and selling $1.36 billion of currency swaps, CM Capital Markets’ Tony Volpon said policy makers could be doing more.

Fed Credit Line

Brazil’s central bank has access to a $30 billion credit line that the Federal Reserve made available in October to help shore up the currency.

As of Dec. 5, the central bank had $207.5 billion of foreign reserves, within $2 billion of a record high reached Sept. 18. The bank bought $6.7 billion worth of reais in the foreign- exchange market from the outset of the credit crisis through the end of November, bank President Henrique Meirelles said last week.

“The central bank is inexplicably not using reserves as aggressively as they should,” said Volpon, chief strategist at CM Capital Markets in Sao Paulo.

The bank announced yesterday a plan to sell as much as another $4 billion of currency swap contracts today. Policy makers will keep the overnight rate at 13.75 percent at a two-day meeting that begins today, according to 41 of 43 economists surveyed by Bloomberg. The other two forecast a reduction.

The central bank has held the rate since September, after increasing it four times this year. The bank will cut the rate to 13.25 percent by the end of 2009, according to the median of 11 forecasts in a Bloomberg survey.

Thin predicts policy makers will lower the rate to as low as 11.25 percent next year.

To contact the reporter on this story: Jamie McGee in New York at jmcgee8@bloomberg.netFrancisco Marcelino in Sao Paulo at mdeoliveira@bloomberg.net