Mantega Calls End to Brazil Currency Rally Amid Threat to Use Derivatives

Brazil Finance Minister Guido Mantega said he’s confident the country’s two-year, 37 percent currency rally is over, which means the government won’t lose money if it decides to buy dollars against reais in the derivatives market.

Mantega made the comments in Brasilia after President Dilma Rousseff authorized Brazil’s sovereign wealth fund to trade currency derivatives in today’s official gazette. The minister didn’t elaborate on the reasons for his currency forecast.

“We’re sure the real will not strengthen,” Mantega told reporters when asked whether the government would offer swaps to stem real gains. “If there’s no strengthening of the real, and we did reverse swap operations, there wouldn’t be any losses. There can even be a profit.”

The real fell for a fourth day in five as traders anticipate the government may step up intervention in currency markets, said Diego Donadio, strategist for Latin America at BNP Paribas in Sao Paulo. The real fell 0.4 percent to 1.6903 per U.S. dollar at 5:24 p.m. in Sao Paulo (2:24 p.m. New York).

Today’s announcement on currency derivatives came after the central bank on Jan. 6 set reserve requirements on short dollar positions held by local banks in its third attempt since October to stem a currency rally that is making Brazilian exports more expensive.

‘Melting’ Dollar

Policy makers in Latin America are trying to stem currency gains as fast economic growth and low interest rates in rich nations attract capital inflows to the region. Mantega said last week that Brazil’s government is ready to take new measures to prevent the dollar from “melting” and stem the real’s 37 percent rally against the dollar in the past two years.

The central bank last used currency derivatives in June 2009, when it offered swap contracts that allowed it to sell dollars against reais in the futures market. Mantega said today the government made money from currency derivatives trading in the past.

The Treasury, which manages the wealth fund, may sign an agreement with the central bank to carry out currency transactions in the spot and futures markets, according to a Sept. 17 decision published today in the Official Gazette

The central bank declined to comment on possible agreements with the Treasury to carry out deals in the derivatives market, said a press officer who can’t be indentified because of internal policy. The Finance Ministry didn’t immediately respond to a request for comment from Bloomberg.

Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

The real may weaken to 1.72 per U.S. dollar this week on fears the government will take additional measures, Donadio said. It could slip to 1.75 should policy makers step into the futures market buying dollars, he said.

Uncomfortable Level

The central bank last offered reverse currency swaps, a contract equivalent to buying dollars in the futures market, in May 5, 2009, helping spark a 1 percent slide in the real that day. Under these contracts, the central bank pays investors the Brazilian overnight interbank rate, now at 10.75 percent, in reais and receives a fixed interest rate in dollars.

“The government is clearly not comfortable with the level where the real is trading,” BNP Paribas’ Donadio said in a telephone interview from Sao Paulo. “It is preparing the legal framework to intervene. The decision to act will hinge on the real’s exchange rate.”

To contact the reporter on this story: Arnaldo Galvao in Brasilia Newsroom at agalvao1@bloomberg.net; Andre Soliani in Brasilia at asoliani@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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