* 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 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
"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
"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."