Brazil’s Real and Stocks Are World’s Best as Foreigners Pile In

Bloomberg — Brazil’s currency and stocks are leading world gains this year as foreign investors keep piling into the nation’s local assets, lured by high interest rates and the massive rally in commodity prices.

The real (BRLUSD) on Thursday strengthened to as much as 4.7663 per dollar, the highest since March 2020, extending its year-to-date advance to more than 16%, the largest among 31 major currencies. Implied volatility in the currency, meanwhile, is at levels unseen since early February. As the real rallied, the return of the local benchmark stocks index in dollar terms jumped to more than 30%, the best among all national equity indexes tracked by Bloomberg.

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Brazil’s markets have been attracting emerging-market investors despite heightened global volatility as local assets benefit from the massive rally in commodity prices and fixed-income securities offer juicy yields following an aggressive monetary policy tightening. Global investors were net buyers of Brazilian stocks in the local market in 53 of the 55 sessions through Mar. 22, adding over 83 billion reais ($17.3 billion) in that period.

“BRL continues to shine under the spotlight,” BBVA strategists led by Roberto Cobo wrote in a note Thursday. “There is still time for the carry trade to outperform as policymakers are waiting for more data before making drastic changes to the interest rate trajectory.”

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The real gained momentum on Wednesday after breaching 4.8942 per dollar, a level that had last been seen in June 2021 and that triggered stops at bearish positions. The currency now has no significant technical barrier until 4 per dollar, an important psychological mark.

Foreign investors, who fueled the real’s rally in the first two months of the year, are resuming their bullish bets after staying in the sidelines for a few weeks due to the Russia-Ukraine war. Non-residents cut their long dollar positions through derivatives by $3.9 billion between March 14 and March 23, while local stocks attracted $1.6 billion in the week ended on March 18, almost four times the previous week inflow, according to local exchange B3 data.

“Attractive Ibovespa valuations, extreme carry, positive terms-of-trade shock are firmly in place,” Alvaro Vivanco, head of emerging-market strategy at NatWest Markets wrote in a note. He’s recommended clients bet on the real versus the Mexican peso since the Ukraine war began last month.

Credit Suisse said the real has room to improve further because it remains undervalued in real terms, with the recent gain only partially reversing the large depreciation of the past few years. Analysts at the bank said in a report Brazil’s real interest-rate differential to the U.S. is close to its historical peak, which supports further currency strength.

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Brazil’s central bank has delivered one of the most aggressive tightening cycles in the world, raising rates by 975 basis points over the past year to fight rising inflation. While officials are now signaling their willingness to end the cycle after a final one-point hike in May, the real’s carry will likely remain elevated for a while before officials find room to ease, as the global commodity rally keeps prices under pressure.