New consensus on Brazil's currency brings down hedging costs

A man is reflected on the glass as a board showing the Real-US dollar and several foreign currencies exchange rates is seen in Rio de Janeiro, Brazil, on May 9, 2016.
A man is reflected on the glass as a board showing the Real-US dollar and several foreign currencies exchange rates is seen in Rio de Janeiro, Brazil, on May 9, 2016. PHOTO: REUTERS

SAO PAULO (Reuters) - Economists are more in agreement than they have been since 2014 about where Brazil's currency is heading after a political crisis unseated President Dilma Rousseff.

The newfound stability has reduced the cost of protection from one of the world's most volatile exchange rates in recent years, offering relief for companies struggling in a recession and making it easier for foreigners to buy into Brazilian markets.

Nearly all of the roughly 100 economists in Brazil's weekly central bank poll now forecast the exchange rate to end 2016 between 3.36 reais and 3.96 reais to the dollar, the narrowest band since March 2014, according to Reuters calculations based on the data's standard deviation.

That spread is half the year's widest, which came on April 1, two weeks before Brazil's lower house voted to oust Rousseff on charges that she broke budget laws. Estimates for the year-end exchange rate rarely tighten so sharply before the final months of the year.

"There were tail risks before the impeachment vote that now seem to have faded," Nomura Securities strategist João Pedro Ribeiro said.

"Though doubts linger, there's a clearer agenda with the new administration."

Rousseff, who denies any wrongdoing, now faces a trial in the Senate that will decide whether she is permanently removed or returned to government. Most believe she will lose the final vote, scheduled for mid-August.

Although the government still faces political scandals, investors have cheered acting President Michel Temer's plans to cope with rising debt and contain public spending.

His clout in Congress also seems greater than that of his leftist predecessor, who struggled to pass austerity measures after years of loose spending and interventionist policies.

Temer's presidency has helped bring down the price of three-month foreign exchange options this month to near a one-year low.

Rates on another common hedging instrument, three-month non-deliverable forwards, have also fallen as the real firmed to its strongest in nearly a year.

Traders refrained from betting on further strength due to central bank interventions that have kept the currency from rallying much past 3.50 reais to the dollar.

The stabler real is good news for companies that sought protection from a volatile exchange rate during the recent political turmoil, one of several factors pushing up financial expenses and eroding profits.

Some companies, mainly exporters, have even started to reduce hedging now that the storm seems to have passed, said Mauricio Auger, who handles corporate hedging in Santander Brasil's treasury department.

"Some are more comfortable increasing their currency exposure at the real's current levels," Auger said.

So far, however, reduced uncertainty has yet to convince global investors to bring their money back to Brazil.

Financial outflows from the country have reached US$30 billion (S$40 billion) so far this year, while foreign ownership of domestic government bonds remains near a two-year trough, central bank and Treasury data show.

Icap brokerage strategist Juliano Ferreira said the decision in Rousseff's Senate trial could trigger a return of foreign investors.

"Foreign investors are waiting for a definite confirmation of a change in government," Ferreira said. "They prefer to miss a couple of rallies to incurring short-term risks."