Bloomberg News

Brazil Real Rises to Six-Week High on Europe Deal, Bank Auction

October 27, 2011

Oct. 27 (Bloomberg) -- Brazil’s real climbed to a six-week high as European leaders agreed to expand a bailout fund to stem the debt crisis and the central bank said it would test demand to sell dollars in the currency futures market.

The real advanced 2.9 percent to 1.7099 per dollar, the biggest gain in three weeks, from 1.7586 yesterday. The currency earlier rallied to 1.7009, the strongest level since Sept. 15.

The 17-nation euro and global equities climbed while bond spreads narrowed after European leaders emerged early today from a 10-hour summit in Brussels armed with a plan they said points the way out of the quagmire, albeit with some details still to be ironed out. The real was also boosted by the central bank’s announcement that it will gauge demand for currency swap contracts today, according to Italo Abucater, head of currency trading at ICAP Brasil SA in Sao Paulo.

“We don’t know if this improvement will last, but the fact that there was an agreement was surprising,” Abucater said in a telephone interview, referring to the European debt accord. The central bank is seeking to roll over contracts it previously placed in the market to avoid a weakening of the real, he said.

“If the central bank didn’t roll over these swap contracts, it would be the equivalent of buying dollars in the futures market,” he said.

The central bank may carry out an auction of such currency derivatives tomorrow, depending on the results of the assessment, according to a statement on its Sisbacen system.

Policy makers sold currency swaps three times starting in September to stem the real’s 13.8 percent decline that month, reversing a 28-month-old strategy aimed at stemming the currency’s rally. There are 48,225 currency swap contracts maturing Nov. 1. Each contract has a notional value of $50,000.

Greek Deal

European leaders persuaded bondholders to accept 50 percent writedowns on Greek debt and boosted their rescue fund’s capacity to 1 trillion euros ($1.4 trillion) in a crisis- fighting package intended to shield the euro area.

Yields on most interest-rate futures contracts rose after the European debt agreement eased concern the crisis will derail global growth and minutes released today from the central bank’s monetary policy meeting indicated policy makers won’t accelerate the pace of reducing borrowing costs.

Yields on the interest-rate futures contract due in January 2013, the most actively-traded today in Sao Paulo, rose six basis points, or 0.06 percentage point, to 10.39 percent. The contract due in January 2017 rose 15 basis points to 11.29 percent.

“The DI market had already priced in two more cuts to the Selic,” Luciano Rostagno, chief strategist at Banco West LB in São Paulo, said in a telephone interview. “With the European decision reducing the scenario of catastrophe a bit, the most liquid contracts like 2013 and 2017 are rising.”

Central Bank Minutes

Brazil’s central bank, in the minutes to its Oct. 18-19 meeting, said slowing global growth will have a disinflationary impact on Latin America’s biggest economy, allowing policy makers to carry out “moderate” cuts to interest rates.

The bank said it sees “declining risks” of missing its 4.5 percent inflation target next year. Annual inflation slowed in October for the first time in 14 months, though it has remained above the 6.5 percent upper limit of the government’s target range for the past six months.

Policy makers cut the benchmark interest rate a half point for a second straight meeting last week, to 11.5 percent, to protect Brazil from turmoil which has wiped more than $6 trillion from world stock markets since the end of July.

Brazil’s jobless rate was unchanged in September at 6 percent, the national statistics agency reported today. Economists had forecast it would fall to 5.8 percent, according to the median estimate of 41 analysts surveyed by Bloomberg.

Traders are betting on at least an additional one percentage point of rate cuts by March, according to Bloomberg estimates based on interest rate futures.

--With assistance from Tais Fuoco in Sao Paulo and Matthew Bristow in Brasilia. Editors: Marie-France Han, Glenn J. Kalinoski

To contact the reporters on this story: Josue Leonel in Sao Paulo at jleonel@bloomberg.net; Gabrielle Coppola in Sao Paulo at gcoppola@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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