BR Real Traders Pay Most in Emerging Markets to Guard Against Drop
By Ye Xie and Tal Barak Harif
May 24 (Bloomberg) -- Brazilian currency traders are paying the highest premium in developing markets to insure against a tumble in the real after Europe’s debt crisis sparked the biggest monthly retreat since November 2008.
One-month options giving investors the right to sell the real cost 7 percentage points more than contracts to buy as of May 20, the most among 24 emerging currencies tracked by Bloomberg. The difference is a change from three months earlier when Russia’s ruble and Hungary’s forint demanded higher premiums for possible declines, data compiled by Bloomberg show.
Investors are concerned that the real, last year’s best- performing currency with a gain of 33 percent against the dollar, will fall as Europe’s crisis threatens both the global recovery and forecasts that Latin America’s largest economy will grow by the most in two decades. Brazilian bond and stock funds lost a net $520 million the past two weeks, the most since February, data compiled by EPFR Global, a research firm in Cambridge, Massachusetts, show. The real sank 5.5 percent the past month.
“The currency was a crowded trade for awhile, and in a time like this, it’s going to be the most impacted,” said Edgardo Sternberg, an emerging-markets strategist at Loomis Sayles in Boston who helps oversee $145 billion. “The country is fine, but people are always nervous.”
The so-called risk-reversal rate has more than tripled from 2.34 percentage points in February in favor of options to give investors the right to sell the real, according to data compiled by Bloomberg.
Bearish Wagers
Foreign institutions made 83,129 more bets on the currency falling than rising as of May 20, data from the BM&FBovespa SA exchange in Sao Paulo. The bearish wagers totaled 104,483 on May 7, the most since February.
The real fell 4.6 percent against the euro last week, the most since February 2009. Before last week’s selloff, the real had gained 13 percent against the euro this year on speculation the crisis would be limited to Europe.
The reversal suggests “market fears have started to morph from a potential European credit event, to a more generalized fear of a double dip in terms of global growth,” Citigroup Inc. analysts led by Dirk Willer wrote in a research note to clients on May 21.
The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries widened 34 basis points, or 0.34 percentage point, last week to 246, according to JPMorgan Chase & Co. The gap is within two basis points of a three-month high reached May 6.
Default Swaps
The cost of credit-default swaps to protect against a default on Brazilian debt for five years rose 17 basis points to 148, according to data compiled by CMA DataVision. Credit- default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
The yield on Brazil’s interest-rate futures contract due in January fell 15 basis points, the biggest decline since March, to 10.93 percent.
The real sank 2.9 percent last week to 1.8534 per dollar, leaving it down 5.9 percent this year.
“The market is overreacting,” said Yerlan Syzdykov, a senior portfolio manager in Dublin at Pioneer Investments, which oversees $236 billion in assets. “Brazil’s growth will accelerate from here. The currency at these levels looks attractive.”
Brazil’s economy will expand 6.3 percent this year, the fastest pace since 1986, according to a central bank survey of about 100 economists published last week.
Forecasts
Syzdykov said the currency will rise to 1.75 per dollar in coming months and he may invest more in local-currency bonds. The real will strengthen to 1.72 by year-end, according to the median forecast of 18 analysts surveyed by Bloomberg.
Even after this year’s decline, the real is about 10 percent “overvalued,” according to Nick Chamie, global head of emerging-markets research at RBC Capital Markets in Toronto.
Traders are expecting the currency’s fluctuation to increase in the coming month. One-month implied volatility on real options jumped to 21.8 percent on May 21, the highest level since July, and climbed to an all-time high of 70.9 percent in October 2008, one month after the collapse of the Lehman Brothers Holdings Inc. led the real to fall to 2.62 per dollar.
Fibria
The increase in volatility and the real’s decline in 2008 contributed to losses at Brazilian companies such as Fibria Celulose SA that made wrong-way currency bets through derivatives. Sao Paulo-based Fibria, the world’s largest pulp producer, will make its final payment tied to $3 billion of debt from wrong-way currency bets by this week, Chief Executive Officer Carlos Aguiar said on May 20.
Derivatives, financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather, are used by companies and investors to hedge against, or speculate on, price changes.
Brazil’s central bank is buying dollars daily, extending a practice it adopted in March 2009, even as the real depreciates. Foreign reserves increased 1.3 percent in the past month to about $250 billion, the fastest growth since November.
“My perception is that in the shorter term we could see it weaker because of the external factors,” said David Beker, head of Latin American economics at Bank of America Merrill Lynch in New York. “Moving forward - the central bank won’t allow the currency to appreciate - 1.70 is floor.”
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Tal Barak Harif in New York at tbarak@bloomberg.net
Last Updated: May 24, 2010 00:17 EDT
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