Brazilian currency rises following hike in key interest rate
April 29,2010
LOS ANGELES (MarketWatch) -- Brazil's currency climbed against the U.S. dollar Thursday with foreign investors searching for attractive returns in the wake of the Brazilian central bank's first interest-rate hike since late 2008.
The Brazilian real rose to 1.730 per dollar, stronger than its finish at 1.751 per dollar on Wednesday.
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Monetary policy makers late Wednesday lifted the benchmark Selic rate to 9.5% from the historic low of 8.75%. The unanimous decision was in line with market expectations for a rate hike.
"There was concern that the economy is expanding at a faster speed than potential. So that made the market ask for [a hike of] more than 50 basis points, and when they got 75, they got happy," said Alfredo Coutino, director of Latin America research at Moody's Economy.com, in a phone interview. Read more in Latin American markets column.
Foreign investors were moving into the real as the interest-rate differential between Brazilian bonds and similar U.S. Treasury bonds widened, making returns from Brazil more attractive, said Coutino.
Inflationary pressures in Latin America's largest economy have been building as economic expansion accelerates. In a statement, policy makers said the decision to lift the Selic rate was made to "assure convergence" of inflation toward the bank's targets.
Inflation as tracked by the IPCA index increased to 5.22% annually through mid-April. The central bank's inflation target for this year and next year is 4.5%.
The key Selic rate was last cut in July 2009 as part of a campaign to stave off the impact of the global financial crisis on Brazil. The central bank's last rate-tightening cycle spanned between March 2008 and September 2008 when the Selic was left at 13.75%.
Strategists polled by the central bank currently expect, on average, the Selic rate to reach 11.75% at the end of 2010. They also expect gross domestic product to reach 6% this year.
But as central bank intervention "tends to pick up" as the currency reaches the 1.70 level, "as do official comments regarding capital controls," the upside for the Brazilian currency appears to be "very limited," wrote Win Thin, senior currency strategist at Brown Brothers Harriman, in a note Thursday.
Elsewhere in market action, Brazil's Bovespa equity index rose 2% and the iShares MSCI Brazil Index ETF /quotes/comstock/13*!ewz/quotes/nls/ewz (EWZ 73.20, +2.19, +3.08%) jumped 3%.
April 29,2010
LOS ANGELES (MarketWatch) -- Brazil's currency climbed against the U.S. dollar Thursday with foreign investors searching for attractive returns in the wake of the Brazilian central bank's first interest-rate hike since late 2008.
The Brazilian real rose to 1.730 per dollar, stronger than its finish at 1.751 per dollar on Wednesday.
News Hub: Obama Nominates Three to Fed Board
Obama plans to nominate two economists and a lawyer to the Fed Board, in what would fill three of the Board's seven seats, reshaping the central bank's top ranks at a critical period for financial regulation and monetary policy. Sudeep Reddy discusses.
Monetary policy makers late Wednesday lifted the benchmark Selic rate to 9.5% from the historic low of 8.75%. The unanimous decision was in line with market expectations for a rate hike.
"There was concern that the economy is expanding at a faster speed than potential. So that made the market ask for [a hike of] more than 50 basis points, and when they got 75, they got happy," said Alfredo Coutino, director of Latin America research at Moody's Economy.com, in a phone interview. Read more in Latin American markets column.
Foreign investors were moving into the real as the interest-rate differential between Brazilian bonds and similar U.S. Treasury bonds widened, making returns from Brazil more attractive, said Coutino.
Inflationary pressures in Latin America's largest economy have been building as economic expansion accelerates. In a statement, policy makers said the decision to lift the Selic rate was made to "assure convergence" of inflation toward the bank's targets.
Inflation as tracked by the IPCA index increased to 5.22% annually through mid-April. The central bank's inflation target for this year and next year is 4.5%.
The key Selic rate was last cut in July 2009 as part of a campaign to stave off the impact of the global financial crisis on Brazil. The central bank's last rate-tightening cycle spanned between March 2008 and September 2008 when the Selic was left at 13.75%.
Strategists polled by the central bank currently expect, on average, the Selic rate to reach 11.75% at the end of 2010. They also expect gross domestic product to reach 6% this year.
But as central bank intervention "tends to pick up" as the currency reaches the 1.70 level, "as do official comments regarding capital controls," the upside for the Brazilian currency appears to be "very limited," wrote Win Thin, senior currency strategist at Brown Brothers Harriman, in a note Thursday.
Elsewhere in market action, Brazil's Bovespa equity index rose 2% and the iShares MSCI Brazil Index ETF /quotes/comstock/13*!ewz/quotes/nls/ewz (EWZ 73.20, +2.19, +3.08%) jumped 3%.