Bloomberg News

Brazil Real Drops to Three-Year Low, Pares Decline as Swaps Sold

May 18, 2012

Brazil’s real fell to a three-year low, prompting the central bank to auction currency swaps for the first time since March to stem the losses.

The currency is still the biggest loser this year among the 16 most-traded counterparts tracked by Bloomberg, having dropped 7.8 percent after the central bank purchased dollars to keep it weak and cut borrowing costs and as turmoil in Europe diminished the prospects for Brazilian assets

“They’re content enough with a weaker currency as long as it’s gradual and orderly,” Flavia Cattan-Naslausky, a markets strategist at Royal Bank of Scotland Group Plc, said by phone from Stamford, Connecticut. “Today might have been too much for them.”

Brazil’s currency dropped as much as 2.4 percent to 2.0573 per dollar, the weakest level since May 2009, before trading down 0.8 percent to 2.0238 per dollar today. The real has fallen 2.8 percent this week, the most since March, in a sixth consecutive five-day decline.

The central bank auctioned all of the 13,000 swap contracts due in June offered today, according to a statement published on its website. A central bank official in Brasilia declined to comment.

Brazilian interest-rate futures contract yields fell to a record low after a report showed the largest Latin American economy unexpectedly shrank, boosting speculation policy makers will extend rate cuts.

Interest Rate-Futures

The yield on the futures contract due in January 2014 decreased 11 basis points, or 0.11 percentage point, to 8.07 percent after earlier touching a record low 8.05 percent. The yield has dropped 40 basis points this week.

Brazil’s seasonally adjusted economic activity index fell 0.35 percent in March from the previous month, the central bank said today. Only one of the analysts surveyed by Bloomberg News had forecast a contraction. The index rose 0.91 percent from the same month a year ago, compared with a 2.4 percent expansion projected by analysts.

German Finance Minister Wolfgang Schaeuble said turmoil in the financial markets caused by Europe’s debt crisis may last another two years, as Group of Eight leaders prepared to discuss Greece and its impact on the global economy.

“The real reached 2 per dollar because the economic outlook is getting worse,” Sidnei Nehme, a director at NGO Corretora in Sao Paulo, said by telephone. “With the crisis abroad becoming more serious, it diminishes the outlook for flows into Brazil.”

Target Rate

Policy makers have reduced Brazil’s target lending rate by 3.5 percentage points since Aug. 31 to 9 percent, the most among the world’s 25 largest economies, according to data compiled by Bloomberg. Policy makers may reduce the benchmark below the record low 8.75 percent to 8 percent by the end of August 2012, trading in interest-rate futures shows.

The currency has traded weaker than 1.90 per dollar since April 30 as the central bank bought $7.2 billion in the spot market last month, the most since $8.4 billion purchased in March 2011.

To contact the reporters on this story: Blake Schmidt in Bogota at bschmidt16@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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