Brazilian banks have turned bearish on the real for the first time since March 2010, sounding a warning note for one of this year’s most popular currency trades and putting pressure on the government to withdraw controversial capital controls.

After recently accumulating bets on the Brazilian real of up to $17bn in the spot market, local banks suddenly reversed their foreign exchange positions in September, switching to a total net short position on the real of $1.3bn, according to central bank data.

“The really big problem for us has been – and still is – Europe. As soon as there is aversion to risk, everyone flees to the US and the dollar,” said João Medeiros, a partner at Pioneer, a Brazilian currency brokerage.

As foreigners ditch the real in the futures market, Brazilian banks have scrambled to cover their positions on the spot market by buying dollars. After peaking this year at $14.7bn in June, these banks’ net holdings of real more than halved to $6.3bn in August, and in September they finally held more dollars than reais for the first time in 18 months. 

FYI: the real has soared about 50 per cent against the dollar from the start of 2009 to July this year.

However, a very weak real can do quite as much damage to the Brazilian economy, said Tony Volpon, head of emerging markets research for the Americas at Nomura.

“Brazilian companies have a lot of dollar-denominated debt so a stronger dollar (against the real) can cause a lot of financial stress,” he said.

“If the central bank doesn’t do anything, and just lets the currency blow out, this cuts the level of these companies’ investments, reduces liquidity and slows down the economy even further,” Mr Volpon said, adding that many companies had only partially hedged their debt.

The central bank has already started to work against itself and the government’s previous measures to weaken the real by selling the greenback against the real via currency swaps this month.

“The central bank established a floor of 1.90 (reais per dollar),” said Pioneer’s Mr Medeiros. “The authorities wanted to remind the banks that they are watching and so they managed to calm the market down, at least for now.”
 Full Financial Times article here.
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