Foreigners Bet $14 Billion on Mantega Failing to Curb Real: Brazil Credit
Brazil's Finance Minister Guido Mantega
Andrew Harrer/Bloomberg
Mantega is seeking to stem a four-month rally that has extended the real’s advance to 34 percent since the end of 2008, the second biggest among emerging-market currencies after the South African rand.
Mantega is seeking to stem a four-month rally that has extended the real’s advance to 34 percent since the end of 2008, the second biggest among emerging-market currencies after the South African rand. Photographer: Andrew Harrer/Bloomberg
Brazilian Finance Minister Guido Mantega’s failure to stem a currency rally spurred by Petroleo Brasileiro SA’s $70 billion share sale is leading international investors to make a $14 billion wager on the real.
Foreigners made 284,967 more bets on the real rising than falling versus the dollar on Sept. 22, the most since June 2007, according to futures contracts trading at BMFBovespa SA exchange in Sao Paulo. With each contract worth $50,000, the net bullish wagers equal about $14 billion. As recently as June, international investors were betting the real would decline.
Mantega is seeking to stem a four-month rally that has extended the real’s advance to 35 percent since the end of 2008, the second biggest among emerging-market currencies after the South African rand. Mantega, 61, vowed in a Sept. 15 speech that Brazil would “not lose this game,” saying the government can join the central bank in buying dollars to shore up exports after the country’s current account deficit surged to a record $45.8 billion in the past 12 months.
“The pressure for the currency appreciation is structural, something that the government cannot fight in the long term,” Roberto Melzi, a strategist at Barclays Plc in New York, said in a telephone interview. “The inflows will continue.”
The central bank has been stepping up dollar purchases as investors poured money into the country to participate in yesterday’s record share sale by Petroleo Brasileiro, the state- run oil company. Banco Central do Brasil bought $5.9 billion in the first 12 days of September, the most in 11 months, according to Altamir Lopes, head of the bank’s economic department.
Central bank President Henrique Meirelles said during an event in New York today that policy makers are ready to act in the foreign-exchange market as Petrobras’s share offering attracted “considerable” dollar inflows.
Growth Surge
The real is also rallying as record low borrowing costs in the U.S. and Europe prompt investors to seek higher returns in faster-growing developing nations. Brazil, Latin America’s biggest economy, will expand more than 7 percent this year for the first time since 1986, according to a central bank survey of analysts. The country’s 10.75 percent benchmark lending rate is more than 900 basis points, or 9 percentage points, higher than the key rates in the U.S., U.K., Japan and euro zone.
“The search for yield is still in place,” Melzi said.
Barclays predicts the real will advance to 1.7 per dollar over the next six months from 1.7230 yesterday. The real touched a nine-month high of 1.7031 on Sept. 14. It has advanced 0.5 percent this week, heading for its sixth straight weekly gain, the longest streak since October when the government imposed taxes on foreign investors in Brazil’s stocks and bonds to curb the real’s rally.
‘No Argument’
Foreign investors’ holdings of local government debt rose in August to a record 150.6 billion reais, or 10.1 percent of the total, from 141 billion reais in July, Fernando Garrido, head of the Public Debt Operations Department at the Treasury, said in Brasilia yesterday. Brazilian companies have taken advantage of the record low rates in developed countries by raising $29 billion in international bond markets this year, up from $22 billion in all of 2009.
“Against inflows, there’s no argument,” Alex Agostini, chief economist at Sao Paulo-based Austin Rating Classificadora, said in a telephone interview. “There’s little the government can do to stop the real’s advance.”
Mantega, who’s served as President Luiz Inacio Lula da Silva’s finance minister since 2006, won approval on Sept. 20 to use a sovereign wealth fund containing 17.9 billion reais to purchase dollars, adding to the central bank’s intervention. He said on Sept. 15 in Rio de Janeiro that the Treasury can tap “unlimited resources” from the fund to buy the U.S. currency.
“Brazil has billions of reais to buy dollars,” Agostini said. “But the world has trillions of dollars to invest.”
Gerdau, Braskem
Paulo Valle, an undersecretary at the Treasury, which reports to Mantega, declined to comment yesterday.
Yields on Brazil’s interbank rate futures contract due in January fell one basis point, or 0.01 percentage point, today to 10.66 percent. The extra yield investors demand to own Brazilian dollar bonds instead of U.S. Treasuries fell 11 basis points to 203, according to JPMorgan Chase & Co. indexes.
The cost of protecting Brazilian bonds against default for five years fell four basis points to 117, 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.
Colombia, Thailand
Gerdau SA, Latin America’s largest steelmaker, sold $1.25 billion of bonds that mature in 2021 to yield 5.875 percent yesterday, according to data compiled by Bloomberg. Braskem SA, Latin America’s largest petrochemicals producer, plans to sell perpetual bonds overseas as soon as next week, according to a person familiar with the offering.
Central banks from Colombia to Thailand are boosting currency intervention to weaken their exchange rates. Colombia’s central bank said on Sept. 15 that it will buy at least $20 million daily for four months or more after the peso surged 13 percent this year. Thailand’s central bank said on Sept. 20 it has won government approval to ease restrictions on capital outflows to ease gains in the baht.
“Market interventions help to slow down the process, but they don’t reverse the trend,” said Pablo Cisilino, who helps manage $14 billion in emerging-market debt at Stone Harbor Investment Partners in New York. “It’s not a problem specific to Brazil. Central banks are all intervening, but no central bank can reverse the trend.”
‘Very Difficult’
Meirelles said Sept. 20 that there’s little policy makers can do to slow the dollar’s declines across the globe as the U.S. economy struggles. The dollar has fallen against all 25 emerging-market countries in the past three months except the Argentine peso.
Economists have raised their year-end forecast for the real for three straight weeks, predicting it will trade at 1.75 per dollar by Dec. 31, according to a central bank survey released on Sept. 20. The median forecast in August was 1.8.
“It’s very difficult for a central bank to bring to a halt the currency appreciation,” Eduardo Suarez, an emerging-markets strategist at Royal Bank of Canada in Toronto, said in a telephone interview. “They’ve been trying for a long time to stem the currency appreciation and the currency keeps rising.”
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net
To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net
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