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Brazilian currency extends its biggest weekly decline since June

By Gabrielle Coppola and Josue Leonel, Bloomberg

November 16, 2012 • Reprints

Brazil’s real fell, extending its biggest weekly drop since June, on speculation the central bank will allow the currency to weaken as U.S. budget wrangling spurs demand for a refuge in the dollar.

The currency depreciated 0.3 percent to 2.0717 per dollar at 12:08 p.m. in Sao Paulo, extending its weekly decline to 1.2 percent, the biggest drop since the five days ended June 15. Swap rates on the contract due in January 2014 fell one basis point, or 0.01 percentage point, to 7.4 percent.

The real is the worst performer in the past year among emerging-market currencies tracked by Bloomberg, having dropped 15 percent. It declined today on bets Brazil’s policy makers won’t intervene to prevent its decline as President Barack Obama prepared to hold talks with lawmakers on averting $607 billion in automatic tax increases and spending cuts.

“The market seems to be pricing in that there won’t be an accord between Obama and the U.S. Congress,” said Alfredo Barbutti, an economist at Liquidez DTVM Ltda. in Sao Paulo. “The dollar has been stronger for days now. The market is testing the central bank.”

Brazil’s central bank has sold reverse currency swaps to keep the real weaker than 2 per dollar to support exporters. It sold $1.4 billion of contracts Oct. 25, $1.6 billion Oct. 23, $1.3 billion Oct. 5, $5.7 billion Sept. 12 through Sept. 17 and $350 million Aug. 21. The August reverse swaps were the first since March.

‘Disconnected’ Real

The real has become “disconnected from fundamentals” and its 2 percent drop this month has been exacerbated by investors shorting the currency because they believe the government will let it depreciate further to help exporters and boost the economy, Tony Volpon, an economist at Nomura Holdings Inc. in New York, wrote in a Nov. 14 report.

Foreign investors betting against the real have increased their positions to $5.25 billion from $4.5 billion a month ago, HSBC Holdings Plc analysts Clyde Wardle and Marjorie Hernandez wrote in a Nov. 14 report.

“There is strong risk aversion abroad and it seems that the government wants the real at a weaker level, but this will have implications for inflation,” Newton Rosa, the chief economist at SulAmerica Investimentos in Sao Paulo, said in a phone interview.

Faster Inflation

Consumer prices as measured by the IPCA index rose 5.45 percent in the 12 months through October, the fastest yearly pace since February, the national statistics agency reported Nov. 7. Monthly inflation quickened to 0.59 percent from 0.57 percent in September.

Brazil’s central bank stepped in to curb the real’s losses by auctioning currency swaps in May and June as European sovereign-debt turmoil drove the currency to a three-year low of 2.1062 per dollar. A strong U.S. currency hurts companies whose expenses are mostly in dollars.

Swap rates were poised for the first drop in eight sessions as budget talks in the U.S. and European debt turmoil sparked growth concern, prompting bets the central bank will leave rates unchanged next year.

The central bank has reduced the target lending rate by 5.25 percentage points since August 2011 to a record low 7.25 percent. The government is extending a year-long effort to kick- start economic growth, which analysts surveyed by Bloomberg forecast will slow to 1.5 percent this year, from 2.7 percent in 2011.

Policy makers will leave the target lending rate at its low until at least May, trading in swap rates indicates. Central bank President Alexandre Tombini reiterated earlier this month plans to keep rates low for a “prolonged time.”

Bloomberg News

About the Author

Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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Related Terms
bank 6455Bloomberg 5254forex 2882Economy 1513fx 1080Barack Obama 909Inflation 395HSBC Holdings Plc 298U.S. Congress 212Brazil 126Nomura Holdings Inc. 103real 46Rupee 40Alexandre Tombini 19national statistics agency 11SulAmerica Investimentos 3Newton Rosa 3Liquidez DTVM Ltda. 2Tony Volpon 2Alfredo Barbutti 2Marjorie Hernandez 1Clyde Wardle 1

Free Newsletter Modern Trader Follow

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