Real Traders Defy Mantega as Currency Gains for Third Week: Brazil Credit
Guido Mantega, finance minister of Brazil
Paulo Fridman/Bloomberg
Guido Mantega, finance minister of Brazil.
Guido Mantega, finance minister of Brazil. Photographer: Paulo Fridman/Bloomberg
Brazilian Finance Minister Guido Mantega is failing to convince currency traders that the real is poised to slump as foreign investment pours into the country’s stock and fixed-income markets.
Four days after Mantega told investors at an Aug. 30 conference in Sao Paulo that the real wouldn’t remain at such “favorable” levels, the currency jumped to an eight-month high for the year. Traders’ confidence in the real is growing as they are paying the smallest premium since April to insure against declines, options contracts show.
Investors are snapping up the real on expectations share sales by Brazilian companies, including an offer that state-run Petroleo Brasileiro SA estimates may total $32 billion, and rising interest rates will attract foreign capital.
“When you have Mantega out there with these different angles, working against the strength of the currency, normally that should provide some kickback, some retreat,” said Enrique Alvarez, head of Latin America fixed-income research at IDEAglobal in New York. “But that has not been the case. The market continues very firm in its intentions to continue appreciating and the flows are just very strong.”
The real strengthened 1 percent this week to 1.7328 per dollar in its third weekly advance, the longest stretch of gains since April. It touched 1.7165 today, the strongest level since Jan. 11. The currency is up 0.7 percent this year after surging 33 percent in 2009.
‘Massive Amount’
Petrobras, as the state-controlled oil company is known, agreed on Sept. 1 to pay the government $42.5 billion for oil reserves, paving the way for a stock sale that may be the biggest in the Western Hemisphere in a decade.
The company may sell as many as 1.59 billion new preferred shares and 2.17 billion new voting shares, amounts that may bring the share sale to minority investors to $32 billion, Petrobras said in a regulatory filing today.
Brazilian companies have raised $12.4 billion in 18 equity offerings this year, a 32 percent increase from the year-earlier period, according to data compiled by Bloomberg. International investors have bought 67 percent of the shares sold this year, BM&F Bovespa SA data show.
“Petrobras is going to bring in a massive amount of the money,” said Henry Stipp, who helps manage $98 billion of assets at Threadneedle Asset Management in London. “Rates are attractive. There’s pressure for the currency to appreciate.”
Record Deficit
The central bank has raised the benchmark lending rate 200 basis points, or 2 percentage points, this year to 10.75 percent to curb inflation as Latin America’s biggest economy grows at its fastest pace in 15 years. After adjusting for inflation, Brazil’s benchmark rate is the second highest among 54 countries tracked by Bloomberg. Only Croatia has higher borrowing costs. Brazil’s economy expanded 8.8 percent in the April-June period from a year earlier after growing 9 percent in the first quarter, the fastest pace since 1995, the government reported today.
Brazil will act “strongly” to avoid the real’s appreciation, Mantega said on a conference call today. The Petrobras share offering is “affecting” the exchange rate, and the currency will go “back to normal” after the sale, he said.
Mantega told reporters in Sao Paulo on Aug. 30 that the currency “won’t remain so favorable” for foreign companies looking to repatriate profits. A month earlier, he said the real will weaken as the current account deficit widens. Brazil’s deficit in the current account, the broadest measure of trade in goods and services, widened to a record $43.8 billion in the 12 months through July.
‘Little Doubt’
“I look at the trend of the current account, and there’s little doubt in my mind that over the next 18 to 24 months, there will be downward pressure on the currency,” said Paulo Vieira da Cunha, a former Brazil central bank director who’s now a partner at Tandem Global Partners LLC in New York. “The finance minister is absolutely right in that sense. In the short-run, however, the currency is driven by the capital flows.”
Option traders are turning the least bearish on the currency since April. One-month options giving investors the right to sell the real cost 3.1 percentage points more than contracts to buy today, compared with 7 percentage points on May 24, according to data compiled by Bloomberg.
The currency will depreciate as policy makers step up their dollar purchases and may intervene in the futures market to weaken the real, according to Oscar Sanchez, an economist at Scotia Capital Inc. in Toronto.
Dollar Purchases
The central bank has more than doubled its dollar purchase to $18.6 billion in the foreign-exchange market this year through August from $7.3 billion in the year-earlier period, according to the bank’s website. Central bank officials called currency traders on July 23 to gauge their demand for so-called reverse currency swaps, which allow policy makers to sell the real for dollars in the futures market.
“The central bank constantly monitors the market and, should the conditions require, the bank will assess the opportunity whether or not to” sell the swaps, the bank said in an e-mailed response to questions yesterday.
The real will weaken to 1.8 per dollar by year-end and remain at that level at the end of 2011, according to the median forecast of analysts surveyed by Bloomberg.
Default Swaps
Yields on the interbank rate futures contract due in January rose one basis point to 10.67 percent today after companies in the U.S. added more jobs than forecast in August, easing concern the economy is falling back into recession.
The extra yield investors demand to own Brazilian dollar- bonds instead of U.S. Treasuries fell seven basis points to 213 today, according to JPMorgan Chase & Co. indexes.
The cost of protecting Brazilian bonds against default for five years dropped four basis points to 118 yesterday, according to CMA DataVision prices. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Until yesterday, the currency had traded in a range between 1.7381 per dollar and 1.8128 since the beginning of July. Average volatility over the past month dropped to 7.3 percent on Aug. 25, the smallest price swing in two years, according to data compiled by Bloomberg.
Benito Berber, a strategist with Nomura Securities Inc., yesterday recommended that clients close out their money-losing bets in non-deliverable forward contracts that the real would depreciate, saying investors expect “heavy capital inflows in the oil sector.”
“There will be fresh money coming in and it’s going to be in the billions order,” Marjorie Hernandez, a currency strategist in New York with HSBC Holdings Plc, said in a telephone interview. “The market will continue testing and the government will come out to meet it at some point.”
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Gabrielle Coppola in New York at gcoppola@bloomberg.net
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