Investors who bet on Brazil’s local bonds this year were saddled with the biggest losses among major economies. The outlook for next year is not much better.
Borrowing US dollars at the end of last year and buying Brazilian reais — a practice known as the carry trade — left investors with losses of 22 percent as Brazil’s currency posted the second-biggest slump in emerging markets amid political turmoil, the country’s worst recession in 25 years and two credit-rating cuts to junk. The loss was almost twice that for traders who bought Mexican pesos and four times for those that bought the won.
Investors got burned after being lured to Brazil by interest rates close to 15 percent, the highest among major economies, which offered an alternative to benchmarks of less than 1 percent from the US to Europe and Japan. While borrowing costs in Brazil are forecast to climb even higher next year, analysts predict the real will post the biggest losses among major currencies as the economy contracts for a second consecutive year. The currency is already the world’s most volatile amid turmoil created by a corruption scandal tied to the state oil company and a push to impeach Brazilian President Dilma Rousseff.
“Uncertainty is huge in Brazil today, and carry-trade strategies become extremely difficult to be effective when you have such high volatility,” Coinvalores CCVM Sao Paulo-based fixed-income strategist Paulo Nepomuceno said. “Gains are not guaranteed despite the high interest rate locally. I don’t see an improvement happening in the short term.”
Real-denominated sovereign notes posted an average loss of 29 percent this year, more than twice the drop for emerging markets and close to 10 percentage points worse than the average slump in Latin American countries, according to JPMorgan Chase & Co indices. One-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, was the highest among 16 major currencies tracked by Bloomberg, at 22.8 percent on Tuesday. It increased 7.95 percentage points this year.
Policymakers are set to increase borrowing costs to 15.25 percent next year from this year’s 14.25 percent, according to a central bank survey of about 100 economists released this week. Analysts expect inflation to slow to 6.86 percent by the end of next year, above the 6.5 percent upper limit of the central bank’s target range. Business and consumer confidence are near record lows.
“I’ve seen many crises before, but can’t remember such low confidence levels,” Nepomuceno said. “People don’t have an idea of what is to come, so there is no way you can stick to your bets in the currency or domestic market. It will be a tough year.”
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