Brazil’s real touched a four-year low, prompting the central bank to intervene for a second straight day to stem the rout. Swap rates surged on concern the weakening currency will cause inflation to accelerate.
The real rose for the first time in six days, appreciating 0.7 percent to 2.1326 per U.S. dollar after dropping 0.9 percent to 2.1656, the weakest intraday level since May 2009. Swap rates due in January 2016 climbed 13 basis points, or 0.13 percentage point, to 10.06 percent after earlier increasing 57 basis points, the most since 2008 on a closing basis. The Ibovespa (IBOV) benchmark stock index tumbled 3 percent, sliding into a bear market.
President Dilma Rousseff prepared to meet Finance Minister Guido Mantega as the two-month selloff in the real threatened to push up import prices and add to an inflation rate that is already at the upper end of policy makers’ target range. The currency fell earlier on signs of a sputtering economy and speculation the U.S. and Japan will curb monetary stimulus programs that have buoyed emerging-market assets.
“It’s going to be hard to completely stop this,” Eduardo Suarez, a strategist at Bank of Nova Scotia, said in a phone interview from Toronto. “People are shifting away from very heavy-handed positions in emerging markets or at least hedging them. So Brazil has a bit of a double whammy right now because there’s not a very constructive view on Brazil.”
Standard & Poor’s lowered the outlook on Brazil’s BBB rating to negative last week on concern over sluggish growth and weakening fiscal accounts. The U.S.’s AA+ credit rating outlook was increased to stable from negative yesterday by S&P, citing receding fiscal risk.
The real erased its drop today as the central bank sold $2.2 billion in currency swaps in a pair of auctions today. Last week the government removed a 6 percent tax on foreign investors who buy Brazilian bonds in the domestic market.
“The fact that Rousseff is meeting with Mantega could mean that they will hammer out some measure,” Ronaldo Patah, the head of fixed income at Itau Asset Management in Sao Paulo, said in a phone interview.
The currency is still too strong for Brazil’s exporters, Robson Andrade, the president of the national industry confederation, known as the CNI, told reporters in Brasilia.
The real has traded in a range of 1.94 to 2.17 per dollar this year as the monetary authority fluctuated between selling currency swaps to prevent it from falling too much and offering reverse swaps to rein in gains. The central bank sold $2.1 billion in currency swaps yesterday.
The three-month volatility of the real increased to 14 percent, the highest since July 2012 and trailing only the South African rand and Mexican peso among the 16 major dollar counterparts tracked by Bloomberg.
Bond markets were also volatile. Brazil sold 344 million reais of inflation-linked bonds due in 2050 today with an average yield of 5.4513 percent, a 0.98 percentage point increase from the previous auction on May 14, according to auction data compiled by Bloomberg.
Yields on outstanding inflation-linked bonds due in 2050 jumped 47 basis points today to 5.51 percent, the biggest increase since the securities were issued in 2010.
The central bank has boosted its benchmark rate 0.75 percentage point this year to 8 percent to curb inflation after lowering it by 5.25 percentage points in cuts that began in August 2011.
The annual rate of consumer price increases quickened in May to 6.50 percent, the upper end of policy makers’ target range, from 6.49 percent the prior month, the government reported last week. The inflation outlook is unfavorable and requires a timely reversal to avoid undermining investment, policy makers said in minutes released last week from the May 28-29 policy meeting.
The economy expanded 0.9 percent last year and will grow 2.53 percent in 2013, according to the median forecast of about 100 analysts in a central bank survey published yesterday. They had projected an expansion of 2.77 percent last week.
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