Brazil’s real gained the most in a month after the central bank stepped up efforts to arrest the world’s worst currency decline, announcing a $60 billion intervention program involving currency swaps and loans.
The central bank will auction $1 billion of dollar loans every Friday starting today and offer the equivalent of $500 million worth of foreign-exchange swaps each day Monday through Thursday, according to a statement late yesterday. The program will run through Dec. 31.
The real climbed 1.8% to 2.3926 per U.S. dollar at 11:20 a.m. in Sao Paulo, erasing its weekly drop. It tumbled to a four-year low of 2.4543 on Aug. 21. Swap rates on contracts maturing on January 2015 fell 21 basis points, or 0.21 percentage point, to 10.38%, trimming their increase since Aug. 16 to five basis points.
“This currency program helps to reduce the market’s apprehension over the exchange rate a bit,” Luciano Rostagno, the chief strategist at Banco Mizuho do Brasil in Sao Paulo, said in a phone interview. “The measures won’t be enough to decouple the real from foreign markets, however.”
The currency has fallen 15% in the past three months, the worst performance among 24 emerging-market dollar counterparts tracked by Bloomberg. The depreciation threatens to stoke inflation, which is at almost the top end of the central bank’s target range. Investors are exiting emerging markets as the Federal Reserve prepares to reduce the amount of money it pumps into the world economy.
Indonesian policy makers said today that they will increase foreign-currency supply to stem a sliding rupiah, while allowing more mineral exports this year to narrow a current-account deficit and spur economic growth. Peru’s central bank sold a record $600 million in the local foreign-exchange market on Aug. 21 to support the sol after it touched a three-year low.
In its defense of the real, Brazil’s central bank has yet to tap into its $374 billion in foreign reserves, which are up from $261 billion three years ago and $48 billion a decade ago.
The intervention announced yesterday adds to swap and credit-line actions already announced this year worth $45 billion. The central bank had been auctioning swaps and loans without an established schedule.
The program is “one of the boldest attempts yet by an emerging-market central bank to shore up its currency following the rout of recent weeks,” Neil Shearing, the chief emerging- markets economist at Capital Economics in London, said in an e- mailed report.
The announcement follows an emergency meeting President Dilma Rousseff called on the evening of Aug. 21 at her residence, Palacio Alvorada, to discuss the weakening currency with central bank president Alexandre Tombini and Finance Minister Guido Mantega. Tombini canceled a trip to Jackson Hole, Wyoming, for the meetings of the world’s top monetary policy makers so he could monitor Brazilian markets.
Policy makers must address fundamental economic issues for investors to regain confidence, Carlos Kawall, the chief economist at Banco J. Safra SA, said by phone from London.
Brazil’s fiscal situation has deteriorated as policy makers increase expenditures while implementing tax cuts worth 35.1 billion reais during the first six months of the year, according to the national tax agency.
“Aside from what the central bank is doing, the government needs to make more difficult decisions to make its fiscal policy more credible,” Kawall said.
Following the central bank’s announcement of the program yesterday, Treasury Undersecretary Paulo Valle told reporters in Brasilia that the Treasury stands ready to act when necessary. The best strategy in moments of volatility is to reduce the debt duration by buying back long-term bonds and selling short term, Valle said.
The real has tumbled 17% this year as investors questioned Rousseff’s ability to attract investment and cut government spending, which has kept inflation above the midpoint of policy makers’ target for 35 months.
Consumer prices as measured by the IPCA-15 price index climbed 0.16% in the month through mid-August, the national statistics agency reported Aug. 21. That was more than double the 0.07% inflation rate in the month through mid- July. Annual inflation eased to 6.15% after surpassing the 6.5% upper limit of the central bank’s target range earlier this year.
Brazil has raised its target lending rate in 2013 more than any major economy, increasing by 1.25 percentage points from a record low 7.25% in April.