By Jamie McGeever
BRASILIA (Reuters) - Brazil's real extended its rally in dramatic fashion on Tuesday, taking advantage of improving global market sentiment and demand for riskier assets to chalk up its biggest rise against the dollar in two years.
The real was one of the worst-performing currencies in the world this year as markets tanked and the global economic and public health crises deepened, sinking to a record low near 6.00 per dollar. But it has roared back in recent weeks.
It rallied more than 3% on Tuesday, its biggest one-day gain since June, 2018, to trade at a seven-week high of 5.20 per dollar (BRBY). As traders rotate out of dollar-denominated assets, a test of 5.00 per dollar is now on traders' radar.
"I wouldn't discard it," said the head of trading at a bank in Sao Paulo, noting huge global monetary and fiscal stimulus, encouraging signs from countries reopening their economies, and surging stock markets.
"However, I am surprised to see how quickly things have happened," he said, also noting that central bank intervention has helped ease the pressure on the real lately.
The real has been closely correlated with Brazilian interest rates recently, generally depreciating when the rates curve steepens and appreciating when it flattens.
The currency's move in the last 10 days has been stronger than the move in interest rates, suggesting any investor cautiousness or bearishness toward Brazil is being expressed in rates, not the currency.
(GRAPHIC - Brazilian real vs rates: https://fingfx.thomsonreuters.com/gfx/mkt/qmyvmobaavr/FXRATES.png)
Traders note that political risk surrounding President Jair Bolsonaro persists, the COVID-19 crisis is far from over and fallout from the looming recession has yet to be felt.
Analysts at Deutsche Bank (DE:DBKGn) reckon record low interest rates, no economic growth and "rising political noise" will see the dollar rise above 6.00 reais in the coming weeks.
But for now, at least, real skeptics have been pushed to the sidelines.