Brazil Real Drops on Speculation Central Bank Will Limit Advance

The real fell from a four-month high on speculation Brazil will limit gains in the currency after it posted the world’s biggest rally.

The currency depreciated 0.5 percent to 2.1864 per U.S. dollar at 12:51 p.m. in Sao Paulo after rising on Oct. 11 to the strongest level on a closing basis since June 17. Today’s drop was the biggest in a week. Swap rates on the contract maturing in January 2015 climbed two basis points, or 0.02 percentage point, to 10.37 percent.

While central bank President Alexandre Tombini said last week that Brazil may extend into 2014 its $60 billion intervention program, traders are projecting that policy makers will refrain from rolling over all of the foreign-exchange swaps that were sold to support currency. That strategy would allow the central bank to keep the real trading in a range before the Federal Reserve begins curtailing a stimulus program that supports emerging-market assets, according to Hideaki Iha, a trader at Fair Corretora in Sao Paulo.

“The central bank can’t let the real continue to gain so far beyond 2.2 per dollar,” Iha said in a telephone interview. “The rollovers are an instrument that provide the right dose to balance the real.”

Tombini said in remarks prepared for an Oct. 12 speech at International Monetary Fund meetings in Washington that policy makers may extend into 2014 currency swaps and credit lines to support the real.

‘Curbing Volatility’

“The program has proved successful in curbing volatility and could be extended beyond year-end if necessary,” he said.

Traders are projecting that price swings in the real will ebb. Implied volatility on three-month real options, which reflects traders’ expectations for future price fluctuations, dropped to 12 percent today, the lowest level since May, according to data compiled by Bloomberg.

The real has gained 11 percent since Aug. 22, when the central bank announced its intervention program to support the currency and curb inflation by restricting import prices. That rally from a 4 1/2-year low is the biggest among all of the world’s dollar counterparts tracked by Bloomberg, leaving it down 10 percent in the past six months. A weaker currency helps the nation’s exporters.

Brazil sold $498 million of currency swaps today. It has $8.9 billion of swaps coming due in November.

“The central bank announced in the past that it would roll over some currency swaps before they matured, so the market will be speculating about that until they mature,” Francisco Carvalho, a currency director at BGC Liquidez in Sao Paulo, said in a phone interview.

Inflation Target

While inflation slowed in September for a third consecutive month, the 5.86 percent annual rate was still more than a percentage point above the middle of Brazil’s 2.5 percent to 6.5 percent preferred range.

Analysts surveyed weekly by the central bank forecast inflation will accelerate to 5.95 percent in 2014 from 5.81 percent at the end of this year, according to the most recent median estimates published today.

The IMF said last week that inflation in Brazil threatens to damp consumption, making interest-rate increases “appropriate.” The fund reduced its 2014 growth forecast for Latin America’s biggest economy to 2.5 percent from 3.2 percent.

To contact the reporters on this story: Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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