Brazilian Real ETF Strengthens On Central Bank Bets

After weakening on an end to easy money, the Brazilian real exchange traded fund is advancing on speculation that the central bank will step in to stem the depreciating currency.

The WisdomTree Brazilian Real Fund (BZF) has declined 3.9% over the past month and is down 9.6% year-to-date.

The real dipped 2.4% last week after the Fed announced its $10 tapering plans, Bloomberg reports.

"It would be natural that the dollar adjusts in Brazil," Jose Carlos Amado, a currency trader at Renascenca Dtvm, said in the article. "Knowing that the central bank is paying attention, the market could back down a bit."

The Brazilian central bank hiked its benchmark Selic rate to 10% from 7.25% this year, reports Erin McCarthy for the Wall Street Journal. Analysts expect the central bank to raise it to at least 10.5% in 2014.

In the fourth quarter, the currency has dropped 6.6%, the most among 16 major U.S. dollar counterparts, on fears that Brazil's fiscal problems could result in a credit rating cut and on speculation that Fed tightening would reduce demand for Brazilian assets.

Both Standard & Poor's and Moody's Investors Service cut their outlook on Brazil's credit rating to two levels above junk as the Brazilian government's budget deficit expanded to 3.4% of GDP, the widest since 2009.

The iShares MSCI Brazil Capped ETF (EWZ), which tracks Brazilian real-denominated large- and mid-cap stocks, has declined 19.9% year-to-date, exacerbated by a depreciating real currency. Meanwhile, the db X-trackers MSCI Brazil Hedged Equity Fund (DBBR), which includes a currency hedged component against a depreciating real, has declined 10.4% year-to-date. However, if the real continues to appreciate, a hedged-equity ETF may not outperform a non-hedged ETF - a stronger foreign currency translates to a greater return when converted back into U.S. dollars.

WisdomTree Brazilian Real Fund

(click to enlarge)

Max Chen contributed to this article.

Source: Brazilian Real ETF Strengthens On Central Bank Bets

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. (More...)

This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.