UPDATE 2-Brazil real hits 10-month high on monetary tightening bets
* Real closes stronger than 1.95/dlr for 1st time since May
* Currency gains follow higher-than-forecast inflation data
* Analysts warn c.bank could intervene to curb big FX moves
By Walter Brandimarte
RIO DE JANEIRO, March 8 (Reuters) - The Brazilian real rallied to a 10-month high on Friday after stronger-than-forecast inflation data increased bets that the central bank will tighten monetary policy, boosting the appeal of assets denominated in the currency.
The real pierced 1.95 per dollar, considered by many analysts as a boundary of an informal trading band imposed by the central bank, leaving investors wondering whether the bank would intervene to curb the currency's gains.
The real closed at 1.9455 per dollar, 0.7 percent stronger than Thursday's close. It has gained nearly 5 percent so far this year as investors have bet the central bank will favor a stronger currency to cheapen the cost of imported goods to help fight inflation.
The currency's gains followed data showing consumer prices jumped more than expected in February despite a government-sponsored cut in electricity rates. The inflation data added to expectations of higher interest rates in the next few months.
"With prospects of higher interest rates, the market is becoming increasingly short dollars until the central bank steps in to draw a line," said Marcos Trabbold, a trader at B&T brokerage in Sao Paulo.
Brazil's interest-rate futures also rallied after the inflation data, with the contract maturing in January 2014 jumping 17 basis points to 7.96 percent.
The domestic yield curve priced in a more than 50 percent chance of a 50-basis-point increase in the central bank's overnight Selic rate in April. For May, the odds of an equal sized hike reached 100 percent. The Selic currently stands at a record low of 7.25 percent.
Banks such as JPMorgan recommended investors stay long the Brazilian currency, betting that further gains would be spurred by a hike in the Selic and by inflows coming from external funding sources for Brazil's medium-term infrastructure projects.
"While risks of intervention have increased with the outperformance and the build up of speculative positions, the appreciation trend, if measured, should not raise eyebrows in the government at the current juncture," Cassiana Fernandez, an analyst at JPMorgan in Brazil, wrote in a research note.
In a sign that more investors are reviewing their estimates to price in recent currency gains, local bank Itaú Unibanco said it now expects the real to close 2013 and 2014 at 2.0 per dollar, stronger than the 2.1 per greenback previously forecast.
"Bigger concern about lingering inflation voiced by policymakers caused the currency to strengthen," the bank's analysts said in a note to clients. "Comments and actions (by policymakers) in the currency market suggest that a real around 2 per dollar, which is closer to macroeconomic fundamentals, is currently the desired level."
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