Brazil Real Hedging Cost Jumps as Latin American Currencies Sink

(Bloomberg) -- The cost of hedging against swings in the real rose the most in a month Friday as Brazil’s currency joined a rout in Latin America on speculation central banks may dial back the cheap money that has been supporting emerging markets.

Of the six worst-performing currencies among developing nations Friday, four of them were from Latin America as a global selloff gathered steam a day after the European Central Bank questioned the need for more monetary stimulus. Colombia’s peso led declines, sinking 2.6 percent, while currencies in Chile, Mexico and and Brazil also fell.

Developing-nation assets including stocks and bonds fell on Friday after ECB President Mario Draghi said that the bank’s officials hadn’t discussed extending asset purchases. The probability of the U.S. Federal Reserve raising rates at the September meeting climbed to 32 percent, up 10 percentage points from Wednesday, according to fed funds futures. Oil and other commodities dropped, dimming the outlook for export revenue in Latin America.

With the Fed due to announce its decision Sept. 21, “expect more nervousness and defensiveness, despite fairly low odds of a hike then,” said Win Thin, an emerging-market strategist at Brown Brothers Harriman & Co. in New York.

The real is particularly sensitive to global interest rates because it’s one of the most popular currencies for the so-called carry trade, in which investors borrow in dollars, yen or euros and buy emerging-market currencies to take advantage of higher yields.

Three-month implied volatility for the real rose 0.91 percentage point to 16.71 percent and passed the Colombian peso to become the second highest in the world. The Brazilian currency lost 1.8 percent to 3.2741 per dollar Friday in Sao Paulo, leaving it down 0.5 percent for the week.

"This fear arising from less stimulus from central banks worldwide and a possible tightening of the Fed are the main drivers of the sell-off in Brazilian assets," said Mauricio Oreng, a senior strategist at Rabobank in Sao Paulo who forecasts the currency will weaken to 3.4 per dollar by year-end.

Colombia’s peso sank 2.6 percent to 2,919.3 per dollar after closing at a four-month high on Thursday. Crude, the country’s biggest export, sank 4 percent, falling for the first time in five days.

“What we’re seeing today is probably profit taking and also some nervousness, in that oil is falling and most emerging market currencies are retreating,” said Camilo Perez, an economist at Banco de Bogota.

In Chile, the world’s largest copper producer, the peso sank 0.9 percent to 670.51 per dollar as the industrial metal retreated 0.5 percent. Mexico’s peso fell for a third day, weakening 1.2 percent to 18.8986 per dollar.

In Brazil, swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, rose 0.12 percentage point to 12.58 percent.

Policy makers are monitoring investors’ perception of risk in Brazil as one of the conditions for monetary easing, central bank president Ilan Goldfajn said in an interview. On Aug. 31, the central bank kept the key rate unchanged at an almost 10-year high of 14.25 percent for the ninth straight meeting.

Asked whether the real, which is the world’s best performing currency this year, is out of line with the economy’s fundamentals, Goldfajn said: "No, because in addition to the fact that it appreciated there’s another, that it depreciated much more than others last year."