Bloomberg News

Brazil Real Gains as Mantega Begins to Unwind Capital Controls

June 14, 2012

Brazil’s real gained for the first time in four days on speculation the government will unwind more capital controls as the European debt crisis worsens.

Investors are anticipating the government will roll back a financial transactions tax on currency derivatives and foreign investment in local fixed-income assets after it removed a levy on overseas loans today. The Finance Ministry isn’t considering changes to a financial transaction tax on derivatives, said a ministry official who couldn’t be identified because of internal policy.

“With the intensification of the euro crisis again, authorities got scared of what the accumulation of all these measures could do in the market now,” Italo Lombardi, Latin America economist at Standard Chartered Bank, said by phone from New York. Further reducing capital controls “definitely has an impact,” he said.

The real climbed 0.8 percent to 2.0554 per U.S. dollar at 6 p.m. in Sao Paulo. The currency earlier today led all of the 25 emerging-market counterparts tracked by Bloomberg. Yields on the interest-rate futures contract due in January 2014 fell two basis points, or 0.02 percentage point, to 7.98 after earlier touching a record low 7.95 percent.

Brazil exempted foreign loans with a maturity of more than two years from a 6 percent tax to help companies and banks roll over debt. The tax was one of a series of measures taken to weaken the real and protect exporters from what President Dilma Rousseff dubbed a “monetary tsunami” unleashed by rich nations seeking to devalue their currencies.

‘Complex Web’

The “excessive liquidity” that led to the implementation of capital controls ended with the worsening of the European debt crisis, Finance Minister Guido Mantega said today in Brasilia.

“This is the first move in dismantling what has become a complex web of controls over capital inflows,” Tony Volpon, head of emerging-markets research for the Americas at Nomura Holdings Inc., wrote in an e-mailed report today. “The measure in itself is unlikely to have a meaningful impact on actual flows in the short term, as only a few top-tier names can access the market at this time.”

Brazilian interest-rate futures yields dropped for a seventh day as retail sales increased less than economists forecast, fueling speculation policy makers will sustain the pace of reductions in borrowing costs.

‘Fall More’

“Brazil still has an interest rate that’s higher than most countries and the trend is for it to fall more,” Andre Perfeito, chief economist at Gradual Investimentos in Sao Paulo, said in a telephone interview.

Retail sales rose 0.8 percent in April after a revised 0.3 percent increase the previous month, the national statistics agency said today in Rio de Janeiro. Economists had predicted an increase of 1.4 percent, according to the median of 31 estimates in a Bloomberg survey. Sales were up 6 percent from a year earlier, compared with 12.5 percent in March.

Traders are anticipating central bank President Alexandre Tombini will reduce the 8.5 percent target lending rate by a half-percentage point at next month’s policy meeting, according to rate futures yields.

“The external environment reinforces the idea that monetary relief should continue,” Lombardi said. “Retail sales weren’t extremely weak, but they were less than expected.”

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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