Bloomberg News

Brazil Real Falls on Bets Government to Weaken It

March 09, 2012

Brazil’s real headed for a second weekly loss as Greece’s move to compel investors to take part in its debt swap damped demand for higher-yielding assets and as speculation mounted that the government may introduce more measures to stem the currency’s gains.

The real weakened 1.1 percent to 1.7803 per U.S. dollar at 12:56 p.m. in Sao Paulo, from 1.7607 yesterday. It has lost 2.8 percent this week, heading for the biggest decline since the week ended Dec. 16.

The real declined with most other major and emerging-market currencies after Greece said it triggered an option compelling investors to take part in its debt swap, the biggest sovereign restructuring in history. The real was also hurt this week by speculation the government may take more steps to curb the real’s gains after enacting two tax increases last week, said Jose Carlos Amado, a currency trader at Renasenca DTVM Ltda in Sao Paulo.

“The question of Greece and Europe continues to make the market uncomfortable,” Amado said by phone from Sao Paulo. “The market has begun to operate with the real above 1.75 per dollar because it knows the government is watching the currency issue.”

The government will keep taking measures to prevent the real from strengthening, Finance Minister Guido Mantega said at a March 7 event in Brasilia. The real has gained 5.7 percent this year, following an 11 percent drop in 2011.

The Finance Ministry declined to comment on the prospect of future measures.

Inflation Slows

The yield on the Brazilian interest-rate futures contract due in January 2013 fell two basis points, or 0.02 percentage point to 8.66 percent, reversing an earlier climb. The yield tumbled 24 basis points yesterday after the central bank cut the benchmark rate 75 basis points to 9.75 percent on March 7 to bolster economic growth, more than the 50 basis-point move predicted by a majority of analysts in a Bloomberg survey.

Traders betting the central bank will maintain the 75 basis-point pace at the next monetary policy meeting in April helped push down futures yields, said Eduardo Galasini, head of treasury at Banco Banif in Sao Paulo.

“The markets are still being affected by Copom, a climate that rates will continue to fall,” Galasini said in a telephone interview. “The market’s mind is that rates have to fall more with everything that’s happening abroad.”

Interest-Rate Outlook

Traders are anticipating central bank President Alexandre Tombini will reduce the Selic rate by as much as 75 basis points in April and to as low as 8.5 percent by July, according to rate futures yields.

Brazil’s consumer prices in February rose at the slowest pace in four months on falling transportation and clothing costs, a government report showed today.

Prices, as measured by the benchmark IPCA (BZPIIPCM) index, rose 0.45 percent in February following a 0.56 percent increase the previous month. The result matched the 0.45 percent median estimate of 51 analysts surveyed by Bloomberg.

Annual inflation slowed for a fifth straight month, to 5.85 percent from a six-year high of 7.31 percent in September. The annual rate was the lowest since November 2010. The government targets annual inflation of 4.5 percent, plus or minus two percentage points.

“The IPCA came in line with expectations,” Andre Perfeito, chief economist at Sao Paulo-based Gradual Investimentos, said by phone from Sao Paulo. “The market will be in stand-by mode until the minutes of the meeting are released to know why the central bank accelerated the cuts.”

The yield on the January 2013 futures contract has fallen 37 basis points this week, the biggest drop since the week ended Sept. 2, according to data compiled by Bloomberg.

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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