UPDATE 1-Brazil's real surges almost 4% this week, biggest rise since December

Market trading boards are seen at the Australian Securities Exchange in Sydney, Friday, February 9, 2018. ( AAP Image/Ben Rushton) NO ARCHIVING

(Adds detail, comment from economists and analysts and CFTC data)

BRASILIA, May 7 (Reuters) – Brazil’s real rose 1% on Friday and hit a four-month high, rounding off its strongest week of the year after surprisingly solid retail sales figures for March cooled fears that a deadly second wave of the COVID-19 pandemic might be pushing the economy into reverse.

Following on from the central bank’s second aggressive interest rate hike on Wednesday and indication it will continue tightening policy in the coming months to quell inflation, the real’s recent upward momentum continued.

The real closed at 5.2271 per dollar, up around 1% on the day and its strongest close since Jan. 14. This week, the real gained almost 4%, its biggest weekly gain since December 8-12.

Economists at Banco Itau on Friday raised their 2021 economic growth forecast to 4.0% from 3.8%, noting that “recent indicators suggest that the economic impact of the second (Covid) wave is being significantly more moderate than that observed in the first wave.”

The March retail sales report showed a far smaller decline than economists had expected.

The real’s rally coincides with the central bank beginning its tightening cycle in mid-March. It has raised the benchmark Selic rate by 150 basis points over two meetings, and shows no sign of stopping.

Only a couple of months ago the real as down 10% year-to-date. It is now almost flat on the year.

Brazil is one of few countries firmly on a rate-raising path, and projected real rates over the next year are among the world’s highest.

According to Jason Vieira at Infinity Asset Management, real rates based on 12-month rate and inflation forecasts are around 1.60% in Brazil, the third highest out of 40 countries analyzed.

Figures from the U.S. Commodity Futures Trading Commission showed funds and speculators on the U.S. futures markets cut bearish bets against the real by the biggest margin in over a year.

They slashed their net short position by 16,388 contracts to 9,898 contracts in the week to May. 4.

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