Shrinking short sale that’s fuelling Brazil’s ‘real’ rally



The currency market is becoming more convinced that the Brazilian real’s world-beating rally this year is far from over.
Foreign investors have reduced their bearish bets against the currency in the futures market by 33 percent since the end of 2015 to $15 billion, the least since November 2013, according to data compiled by Bloomberg and BM&FBovespa SA, Latin America’s largest exchange. The wagers had swelled to a record $39 billion in May 2015.
Brazil bears and most forecasters were caught off-guard by the real’s 10 percent appreciation in the first quarter, which was fueled by optimism that the impeachment of President Dilma Rousseff will usher in a new government better equipped to kick-start growth in Latin America’s biggest economy and cut spending.
A further unwinding may add fresh support for the real, complicating Central Bank efforts to slow the rally.
“It’s expensive to bet against the real,” Paulo Nepomuceno, a fixed-income strategist at brokerage Coinvalores CCVM in Sao Paulo, said in a phone interview. “The political scenario is improving here. A credibility shock could bring foreign money back to Brazil.”
It costs short sellers about 11 percent a year to keep their bearish position, based on implied yields in forwards. The real would need to weaken by more than that to make it a winning bet. That’s becoming more of a long shot after foreigners injected $4 billion into the economy this month through April 15.
It follows foreign-exchange outflows, including trade and investment, of a combined $12 billion in the previous two months, according to the central bank.
This year, the real has gained 11 percent, reaching an eight-month high of 3.4607 per dollar on April 14. The momentum has slowed over the last month as the central bank resumed sales of reverse currency swaps, the equivalent of buying dollars in the futures market.

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