Brazil Extends Rally

The Brazilian real is off to a firm start, promising to extend its rally for the fifth consecutive week--something that it has been unable to do in the past five months. There are four drivers and they may, taken together, rise the ire of officials who want to prevent further deterioration of the current account position. In July, Brazil's 12-month current account deficit stood at $43.2 bln. In July 2009, the 12-month c/a deficit was about $18 bln.

The first driver of the real and the most immediate today China's stronger than expected data. This suggests still good demand for Brazil's commodities and speak to the risk-on environment.

The second driver the strong interest in Brazil real bonds. Brazilian companies raised ~$4.4 bln last week in bond sales, the highest weekly amount this year.

The third driver is interest in Petrobras's equity $32 bln equity issuance later this month.

The forth driver is that the central bank's latest survey shows economists have risen up their expectation for inflation and the Selic rate.

The US dollar has fallen through BRL1.72 and is trading at its lowest level since the end of last year. Officials had last week stepped up their verbal warnings against BRL appreciation and intervened twice on three days. Additional escalation of rhetoric and intervention seem likely. There is talk in some quarters that intervention could take place in the futures market as well as in spot. Key support is seen near BRL.170.

In the Jan-Aug period, Brazil intervened to the tune of ~$18.5 bln. In the same '09 period, the dollar purchases were closer to $7.3 bln.

Meanwhile, there is a bit less than 3 weeks until Brazil's elections. Dilma Rousseff appears poised to win handily, with the latest polls showing her 50% vs Serra's 27%.