Brazil's real chalked up its third strongest weekly gain of the year on Friday, spurred by a Wall Street-led global rally in risky assets and as speculators covered their largest short position in the currency in almost five years. Having been beaten down in recent months by falling interest rates and rising concern over Brazil's economy, the real roared back this week, rallying 2.6% against the dollar.

That marked only its second weekly rise in the past 12 weeks and the highest since February, pushing the dollar to its lowest closing level of 4.0569 reais since Aug. 21. "The real remains mispriced relative to its fundamentals," Deutsche Bank said in a report on Friday, noting that its underperformance is surprising in light of imminent pension reform approval, upcoming oil fields auctions, and the large number of privatizations in the pipeline.

"A partial normalization of the flow of dollars across Brazilian borders will drive the dollar towards 3.90 later in the year," they wrote. Weekly data from the US Commodity Futures Trading Commission (CFTC) on Friday showed just how bearish international funds have become on the real recently, and therefore how much scope there was for a rebound.

Its net short position as of Oct. 1 was 39,880 contracts, the biggest collective bet on the currency weakening since December 2014, and an increase from 34,451 contracts the week before.

Copyright Reuters, 2019