Brazil's real hits 10-month-high on China, inflows

SAO PAULO Aug 3 (Reuters) - Brazil's currency jumped to its highest level in more than ten months on Monday as improved bank earnings in Europe and strong Chinese demand for commodities fueled hopes of a global economic rebound.

The real BRBY, one of the world's best performing currencies this year, opened 1.2 percent stronger at 1.846 reais to the dollar in early trading and later changed hands at 1.848 to the dollar, up 1 percent from Friday's close.

As data from the United States and other developed economies showed signs that the worst of their recessions might have past, global investors eyed emerging market countries like Brazil to boost returns as risk aversion eases.

Last week, emerging market bond and equity funds had their best and second-best weeks, respectively, in terms of client flows since last August, according to Commerzbank.

Investors committed almost $3 billion in total to equity funds in Asia and Latin America in the period versus $2.5 billion in the preceding week.

"Flows have sent the real higher for a while, but it is the news about the improving global scenario that lifted markets," said Carlos Gandolfo, a partner with Pioneer Corretora de Cambio, one of the largest currency trading houses in Brazil.

One trader, who declined to be identified because he is not authorized by his firm to speak publicly, said part of the gain in the real was due to the repatriation of some of the $1 billion that state-run power utility Eletrobras (ELET6.SA) raised in a global bond sale last month.

Global equities rose in the wake of encouraging second-quarter results by some European banks afflicted by the the credit crisis since early 2007.

Barclays Plc (BARC.L)(BCS.N) reported an 8 percent rise in half-year profit. HSBC Holdings PLC (HSBA.L)(HBC.N) said first-half profit fell by one-half from a year ago, but the results were better than analysts expected.

"Positive surprises in activity indicators are popping up here and there," said Dalton Gardimam, chief economist for Bradesco Corretora.

Brazil's benchmark stock index, the Bovespa .BVSP, jumped 2 percent to 55,852.52, the third straight day of gains, led by Petrobras (PETR4.SA) and Vale (VALE5.SA). The two stocks are the biggest in the 65-share index.

Pioneer's Gandolfo said foreign investors' appetite for Brazilian stocks and fixed income will probably push the real as high as 1.8 per dollar by the end of the month. Francisco Carvalho, head of currency trading at Liquidez Corretora, the largest foreign exchange trader in Brazil, expects the currency to trade around the same level.

IDEAGlobal, a New York-based market research firm, sees the real strengthening to a high of 1.85 as early as this week.

Companies and shareholders have raised about 18 billion reais ($9.7 billion) from share offerings -- of which about half have been tapped by global investors.

BOVESPA HIGH

The Bovespa is now at its highest since Aug. 28. Petrobras rose 0.3 percent to 32.06 reais as oil CLc1 rallied 3.2 percent on Monday.

Vale (VALE5.SA) advanced 2.2 percent to 33.10 reais, the highest since June 12.

Steelmakers rose despite expectations of a steep decline in second-quarter profits. Gerdau (GGBR4.SA), the largest steelmaker in the Americas, gained 1.8 percent to 22.32 reais.

Even with the flurry of domestic data this week in Brazilian markets, investors will remain focused on global developments, mainly the release of U.S. employment data for July, IDEAGlobal strategist Enrique Alvarez said Monday.

Among data to be released this week in Brazil, the government will unveil July trade balance and the benchmark IPCA inflation index for July. It said Monday that industrial output rose for a sixth straight month in June. (For story, see [ID:nN0367085]).

Benign inflation may pull yields on interest rates futures <0#DIJ:> down this week, traders said. The yield on the contract due in January 2011 rose 0.04 percentage point, or 4 basis points, to 9.88 percent from Friday.

The yield reflects expectations for the level of the benchmark central bank lending rate Selic by the end of 2010. (Editing by Jeffrey Benkoe)