Real Traders Pay Highest Insurance as Rate Hikes Slow

Brazilian real traders are paying the highest premium in the world to insure against currency declines after speculation the central bank is done raising rates made it the worst performer over the past month.

Three-month options giving investors the right to sell the real cost 525 basis points, or 5.25 percentage points, more than contracts to buy yesterday, the most among 47 major currencies tracked by Bloomberg. Three months ago, the differential was 4.9 points.

The real’s 0.1 percent gain against the dollar in the past month through yesterday was the smallest among the 16 most- traded currencies as traders began betting central bank President Henrique Meirelles may stop raising the benchmark lending rate as inflation slows, futures contracts show. Meirelles, 64, boosted the rate 200 basis points this year to 10.75 percent, luring carry-trade investors who borrow in a country with low interest rates and buy higher-yielding assets elsewhere.

“The impact of higher rates probably is gone and at this point it could hurt the currency as the carry trade probably won’t be as great as before,” said Marcelo Saddi Castro, who oversees 18 billion reais ($10.3 billion) as chief investment officer at SulAmerica Investimentos in Sao Paulo.

The real will weaken 1.5 percent versus the dollar to 1.78 by the end of the third quarter, according to the median estimate in a Bloomberg survey of 19 economists. It dropped 1.2 percent to 1.7748 per dollar at 5:36 p.m. in New York and has declined 1.7 percent this year after soaring 33 percent in 2009.

Petrobras Sale

The currency is also underperforming on speculation state-controlled oil company Petroleo Brasileiro SA may push back its planned $25 billion share sale again, according to Societe Generale SA.

Petrobras, as the Rio de Janeiro-based company is known, and the National Petroleum Agency disagree on the price per barrel in a share-for-oil swap that’s part of the stock sale plan, O Estado de S. Paulo reported yesterday, without saying where it obtained the information.

The swap, part of an effort to finance a $224 billion investment plan to develop the largest oil discovery in three decades, was delayed until September pending a valuation of the reserves by a state agency.

Press officials at Petrobras and the National Petroleum Agency declined to comment.

The share sale may be tough to complete before presidential and congressional elections in October, said Alejandro Cuadrado, a Latin America economist at Societe in New York.

‘Sensitive Issue’

“Some people are looking into that potential Petrobras delay given the calendar,” Cuadrado said in a telephone interview. “It may be a sensitive issue.”

The extra yield investors demand to hold Brazilian dollar bonds instead of U.S. securities narrowed three basis points to 192, according to JPMorgan Chase & Co.

The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps rose four basis points to 115, according to data compiled by CMA DataVision. 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.

While traders expectations for interest-rate increases in Brazil are waning, the country’s fixed-income assets still offer a yield premium over developed-nation bonds, helping support the real, according to Clyde Wardle, an emerging-market currency strategist at HSBC Holdings Plc. Real-denominated bonds due in 2021 yield 11.81 percent, compared with 2.68 percent for 10-year U.S. Treasuries.

‘Massive Change’

“Yields are still very high in the context of G-7 nations’ yields,” Wardle said in a phone interview from New York.

Brazilian inflation eased to the lowest two-month rate since 2006 in June and July, indicating the expansion in Latin America’s biggest economy is slowing. The economy may be growing at a “sustainable” level, helping curb price increases, the central bank said in the minutes of its July 20-21 meeting, when it raised interest rates by a less-than-forecast 50 basis points.

Gross domestic product will expand 7.1 percent this year, according to a central bank survey of about 100 financial institutions published Aug. 9. The median estimate was 7.2 percent last week.

Yields on interest-rate futures due in January climbed two basis points to 10.79 percent. The level implies traders are no longer predicting a full 25-basis-point increase in the benchmark lending rate by year-end to 11 percent, according to data compiled by Bloomberg. In February, traders predicted a year-end rate of about 12.35 percent.

“The market has re-priced the outlook of monetary policy to next to nothing through December,” said Roberto Melzi, a strategist at Barclays Plc in New York. “There was a massive change of expectations.”

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