Bloomberg News

Brazil Real Gains First Day in Four on Dollar Auction, Europe

December 16, 2011

Dec. 15 (Bloomberg) -- Brazil’s real gained for the first day in four after the central bank said it will lend dollars to help exporters, adding to the supply of the U.S. currency.

The real rose 1.1 percent to 1.8596 per dollar at 3:12 p.m. in Sao Paulo, from 1.8799 yesterday. Brazil’s central bank rejected all bids at its auction today to sell dollars with an agreement to repurchase them at a later date.

Finance Minister Guido Mantega said Brazil wants to use the auctions to help exporters should the global economic outlook worsen, O Estado de S. Paulo reported, citing an interview with the minister. The auctions can provide a credit line to exporters for trade financing as Europe’s debt crisis curbs the supply of dollars, said Jose Marcio Camargo, an economist at Opus Gestao de Recursos Ltda. in Rio de Janeiro.

“We had a reduction in the supply of credit in Brazil because of the European crisis,” Camargo said in a telephone interview. “The central bank is trying to avoid a problem. It’s more of a preventative action.”

The repo mechanism, which is the equivalent of lending dollars to banks, hasn’t been used since liquidity dried up in the wake of Lehman Brothers Holdings Inc.’s bankruptcy in 2008. Investors pulled $1.5 billion out of Brazil from Oct. 1 through Dec. 9 as they fled to lower-risk investments to protect themselves from the deepening European debt crisis.

Brazil’s currency has declined 8.1 percent against the dollar in the past three months, the third-worst performance of the world’s 16 most-traded currencies.

The central bank wants to limit the real’s decline so it can continue cutting interest rates and keep inflation under control, said Ram Bala Chandran, a Latin American currency and rates strategist at Citigroup Inc. in New York.

“It’s very hard to target the level of the currency, but on lowering volatility, they will definitely achieve that,” he said. “The only way to help exporters is to remove the carry trade from the real, and they’re basically working towards it.”

European Crisis

Today’s auction didn’t result in any sales because investors put in bids that were too low, Italo Abucater, head of currency trading at ICAP Brasil SA in Sao Paulo, said in a telephone interview.

“The market tried to buy dollars at yesterday’s rates,” when the real was weaker, Abucater said. “The central bank didn’t want to sell.”

The bank in today’s auction offered to deliver dollars on Dec. 19 and repurchase them on either Jan. 18 or Feb. 16.

The last time the repo mechanism was used was in April 2009, when the bank sold $500 million.

The real pared gains after the head of the International Monetary Fund said the European debt crisis is escalating to the point that it will not be solved by one group of countries, tempering optimism the crisis will be contained.

U.S. Data

The number of applications for unemployment benefits in the U.S. unexpectedly dropped last week to the lowest level in three years, showing the U.S. labor market is improving and strengthening global growth optimism.

Yields on most interest-rate futures contracts rose after Brazilian prices rose 0.19 percent in the 30 days to Dec. 10 after a 0.44 percent increase a month earlier, according to the Getulio Vargas Foundation’s IGP-10 inflation report. This month’s reading trailed the 0.35 percent median estimate of 29 analysts surveyed by Bloomberg.

This month’s report showed consumer prices up 0.65 percent, while wholesale prices declined 0.03 percent.

“Even though the IGP-10 slowed, consumer prices sped up,” Mauricio Nakahodo, senior economist at CM Capital Markets Ltda in Sao Paulo, said in a telephone interview. “The fact that the external scenario is a little better helps pressure the yield curve.”

Yields on the interest-rate futures contract due in January 2014 rose five basis points, or 0.05 percentage point, to 10.27 percent. Yields on the contract due in January 2013 were unchanged at 9.9 percent after earlier rising as much as three basis points.

--With assistance from Veronica Navarro Espinosa in New York and Alex Cuadros in Sao Paulo. Editors: Glenn J. Kalinoski, Richard Richtmyer

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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