Bloomberg News

Brazil Real Weakens on Currency Measure, Slower Chinese Exports

March 12, 2012

Brazil’s real declined to the weakest level in two months after the government extended a tax on foreign loans and bonds by local companies to curb the currency’s gains and Chinese exports grew at a slower pace than forecast, damping global growth optimism.

The real fell 0.9 percent to 1.8077 per U.S. dollar at 10:32 a.m. in Sao Paulo, from 1.7912 on March 9. It earlier touched 1.8177 per dollar, the weakest level since Jan. 10. The yield on the interest-rate futures contract due in January rose two basis points, or 0.02 percentage point, to 8.67 percent.

Brazil imposed a 6 percent so-called IOF tax on foreign loans and bonds by local companies with a duration of as much as five years, according to a decree published today in the official gazette. Previously the IOF financial transactions tax only applied to foreign borrowing of as many as three years. China, Brazil’s biggest trading partner, reported the biggest trade deficit in at least 22 years, signaling weakened global demand.

“The arsenal that the government is using should help sustain the dollar,” said Francisco Carvalho, currency director at Liquidez DTVM in Sao Paulo. “The external environment also helps to push up the dollar.”

Exports from China rose 18.4 percent last month from a year earlier, while imports gained 39.6 percent. Analysts forecast a 31.1 percent increase in overseas sales and that inbound shipments would rise 31.8 percent, based on estimates from Bloomberg News surveys.

‘Sustainable Level’

Brazil’s real needs to lose 20 percent to reach a “sustainable level,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said in an interview in London today.

“Brazil’s biggest cyclical challenge is to get rid of the strength of the real,” O’Neill said.

Interest-rate futures yields rose for the first time in two weeks after a central bank survey showed analysts covering the Brazilian economy forecast consumer prices will rise 5.5 percent next year, up from an estimate of 5.2 percent the previous week.

“The Focus forecast rose a lot,” Solange Srour, chief economist at BNY Mellon ARX Investimentos, said by phone from Rio de Janeiro. The central bank’s decision to cut the benchmark rate by 75 basis points last week “changed the market’s mind.”

Central bankers led by President Alexandre Tombini stepped up the pace of interest-rate cuts on March 7, cutting the benchmark overnight rate 75 basis points to 9.75 percent, to help spur growth and diminish the allure of the country’s fixed- income assets. Policy makers have lowered the rate 275 basis points since August.

Brazil’s central bank will cut the Selic rate to 9 percent by the end of the year, down from 9.5 percent a week earlier, according to the median forecast in the March 9 central bank survey of about 100 economists published today. Analysts expect the bank to raise the rate to 10 percent by year-end 2013.

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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