Top Brazil Real Forecaster Says Currency to Reach 11-Year High

By Fabio Alves

Aug. 14 (Bloomberg) -- Brazil’s real, the best-performing currency this year, will climb 18 percent by the end of 2010 as exports to China surge and stock inflows grow, said Standard Chartered Plc, the firm that most accurately forecast the rally.

The real will rise to 1.8 per dollar by the end of this year from 1.8236 and reach an 11-year high of 1.55 by December 2010, according to the London-based bank that gets most of its revenue from developing nations. The real gained 27 percent this year, more than all other 171 currencies tracked by Bloomberg.

Rising demand for Brazilian sugar, coffee and orange juice helped the trade surplus expand 16 percent between January and July from the same period in 2008 as China overtook the U.S. as the country’s biggest export market, according to Brazil’s Trade Ministry. The dollar revenue likely will overwhelm central bank efforts to staunch the real’s advance by intervening in the foreign-exchange market, said Mike Moran, a senior currency strategist at Standard Chartered in New York.

“We’re going to see a tremendous amount of more trade between Brazil and China,” Moran said in a telephone interview. “The positive trade flows will be quite supportive for the currency.”

Central bank President Henrique Meirelles told Brazilian President Luiz Inacio Lula da Silva that he plans to step up dollar purchases to quell the real’s gains, Folha de S. Paulo reported yesterday, without saying how it obtained the information.

‘Excess Euphoria’

Asked about the report yesterday, Meirelles told reporters in Goiania, a city in central Brazil, that “the central bank buys according to market flows and doesn’t try to influence the rate.” Last week he said investors needed to be cautious about “excess euphoria” as the nation’s currency and stocks surge, reiterating a concern he’s stated several times this year.

Brazil’s foreign reserves climbed to a record $213 billion from $199 billion at the end of February after the central bank re-started its dollar-purchasing program in May.

The real is benefiting from a rebound in commodities, which account for about two-thirds of Brazilian exports. Prices have climbed 31 percent since the end of February, according to the UBS Bloomberg Constant Index of 26 raw materials.

Increased demand for Brazilian stocks and bonds also is lifting the real as Latin America’s largest economy recovers from a recession and interest rates remain high relative to developed markets, said Douglas Smith, Standard Chartered’s chief economist for the Americas in New York.

Stocks Rally

The Bovespa stock index has risen 52 percent this year, the world’s 12th-best performer among 89 measures tracked by Bloomberg, as foreign investors moved 13.7 billion reais into the market through July, the most since the exchange began tracking data in 1993. Brazilian local bonds returned 37 percent in dollar terms after falling 13.8 percent in 2008, according to JPMorgan Chase & Co.’s ELMI+ index.

The nation’s 8.75 percent benchmark interest rate, while down from 13 percent a year ago, remains the second-highest among the 10 countries in the Americas tracked by Bloomberg. Only Argentina’s benchmark rate is higher at 11.5 percent.

Standard Chartered’s real forecast for the end of 2010 would surpass the 1.5545 level it reached in August 2008 before tumbling 33 percent over the next five months as credit markets seized up and commodities tumbled.

In January, when the real traded as weak as 2.3996, Moran and Smith predicted it would rebound to 1.9 by the end of this year, compared with the 2.24 median forecast in a Bloomberg survey. The median forecast since has shifted to match Standard Chartered’s initial outlook, highlighting how the real’s rally caught most economists off guard. Moran and Smith, meanwhile, adjusted their year-end call in June to 1.8 per dollar.

‘Severe Undervaluation’

“We saw a severe undervaluation of the currency at the end of 2008,” said Moran, 35. “The real was heavily oversold.”

The real has soared 34 percent since sliding to a 2 1/2- month low of 2.4501 per dollar on March 2. It touched a 10-month high of 1.8065 last week.

“Everybody was surprised by the rally,” said Aryam Vazquez, an emerging-market economist at Wells Fargo & Co. in New York. He’s changed his year-end real forecast to 1.8 from 2.5 at the start of the year. “The resilience of the Brazilian economy to weather this crisis has been spectacular and has been the driving force behind the real,” Vazquez said.

Retail Sales

The International Monetary Fund predicts Brazil’s gross domestic product will shrink 1.3 percent this year, less than the 7.3 percent contraction it forecasts for Mexico, Latin America’s second-biggest economy, and the 3.8 percent drop projected for advanced economies. Brazilian retail sales rose 5.6 percent in June, almost double the 2.9 percent pace in May, a government report showed yesterday.

A recovering economy “supports the strong direct investment in Brazil,” said Smith, 39, who began covering Brazil as an economist at the U.S. Treasury Department in 1998.

Standard Chartered’s projection for the real at the end of 2010 is more bullish than the 1.8 per dollar median forecast of analysts surveyed by Bloomberg.

“The outlook for Brazil remains positive,” said Smith. It “highlights Brazil as a good destination” for foreign investment, he said.

To contact the reporter on this story: Fabio Alves in New York at falves3@bloomberg.net