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Brazil real to slip as growth slows, election looms

Published 07/21/2010, 08:15 AM
Updated 07/21/2010, 08:20 AM

* Brazil's presidential race creates uncertainty

* Indian rupee to firm against dollar over 12 months

* Russian rouble to strengthen versus dollar, euro

By Samantha Pearson and Anurag Joshi

SAO PAULO/MUMBAI, July 21 (Reuters) - A slowdown in Brazil's booming economy and jitters over the country's presidential election will cause the real to trail behind other BRIC nations' currencies over the next year, a Reuters poll showed on Wednesday.

While the currencies of India, China and Russia should appreciate modestly over the next 12 months, the Brazilian real is expected to weaken to 1.82 per dollar by the end of June 2011, according to the median prediction from 47 analysts.

Forecasters downgraded their outlook for the Russian rouble versus the dollar compared with the previous Reuters poll in March and they remained cautious about Brazil's currency.

The so-called BRIC nations have assumed ever-greater importance in the world, as those economies have begun to outgrow their more developed counterparts. Analysts credit expanding BRIC economies with boosting the global recovery.

But previous currency gains in Brazil mean the real could struggle to hold on to its current level.

"Brazil is still overvalued," said Flavia Cattan-Naslausky of RBS Securities. "So overall, that's actually a pretty decent performance for the currency."

Foreign investors trade Brazil's real through non-deliverable forwards, or NDFs -- used when a currency cannot be used for settlement outside its country of origin. NDFs are settled in cash and in dollars.

Brazil's economy bounced back from the global financial crisis last year due to strong demand from the country's growing middle class and government tax breaks.

And as investors worldwide flocked to the country's high-yielding assets, the real surged 34 percent last year.

But recent data, including inflation and industrial production, have suggested Latin America's biggest economy is slowing as the effects of government stimulus measures wear off.

Worries that a European debt crisis and sluggish U.S. growth could reduce demand for Brazil's commodity exports have also helped weaken the real about 2 percent so far this year.

A presidential election in October, and its continuing effects, could add to the pressure -- albeit perhaps only temporarily.

"The elections could bring some volatility, which should dissipate once the market sees there are no big (policy) ruptures," said Andre Sacconato, an economist at Tendencias consultancy in Sao Paulo.

INDIAN RUPEE TO RECOVER

The partially convertible Indian rupee ranked once again as forecasters' top bet for appreciation among the BRIC currencies.

The rupee, which has lost nearly 7 percent from its 2010 peak of 44.18 per dollar hit in April, is expected to recover some lost ground, as the growing economy draws foreign investors.

The rupee has been convertible on current account since 1994, meaning it can be changed freely into foreign currency for purposes like trade-related expenses. But it cannot be converted freely for activities like acquiring overseas assets.

The rupee should appreciate around 6 percent to 44.6 by the end of June next year, according to the median poll forecast.

"One of the critical value drivers for the rupee are the growth prospects, and returns India offers will be higher. In the usual scenario, we should see more capital inflows," said Dharmakirti Joshi, chief economist with rating agency CRISIL.

Russia's rouble was seen strengthening a bit to 29.6 per dollar in 12 months from around 30.45 on Wednesday, and to 36.75 per euro from 39.03 currently.

The 12-month forecast spread for the rouble against the euro was the narrowest since this poll was launched in October last year, suggesting a greater sense of confidence. But analysts nonetheless saw reason for caution.

"It would be naive to think that all is rosy in Russia. By no measures is domestic demand back to pre-crisis levels, and it will take time for households to regain their wealth," said Guillaume Tresca of Credit Agricole CIB.

"In this regard, the political authorities have failed to put in place the structural reforms that would allow the Russian economy to be less dependent on external growth."

Russia has pledged to move towards a free float and has lifted most capital controls, but the central bank still intervenes regularly to smooth exchange rate fluctuations and has said repeatedly said that it is not considering completely abandoning interventions in the future.

Meanwhile, China will be true to its word and prevent a sharp rise in the newly unshackled yuan over the next year, according to a Reuters poll conducted on June 21.

The yuan will end 2010 at 6.67 per dollar, according to the median forecast of 33 economists. (Polling by Bangalore polling unit, additional reporting by James Matthews in Sao Paulo, Maya Dyakina and Lidia Kelly in Moscow, and Alan Wheatley in Beijing; Editing by Ross Finley and Stephen Nisbet)

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