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Real’s Plunge Triggers Intervention Reversal: Brazil Credit

Real’s Plunge May Trigger Intervention Reversal
Brazil’s currency has lost 8.6 percent against the dollar since Sept. 14, the most since the global financial crisis drove it down 10.9 percent in the five days through Dec. 3, 2008, according to data compiled by Bloomberg. Photographer: Adriano Machado/Bloomberg

The real’s biggest five-day plunge since 1999 prompted Brazil to use derivatives to shore up the currency, reversing a 28-month-old strategy aimed at stemming gains.

Brazil’s currency tumbled as much as 4.1 percent against the dollar today before the central bank auctioned swaps that are equivalent to selling dollars in the futures market, helping the real pare losses to 0.9 percent. The real has lost 9.4 percent since Sept. 14, handing investors in real-denominated bonds a loss of 13.5 percent in dollar terms this month through yesterday, the worst performance in emerging markets, according to data compiled by JPMorgan Chase & Co.

Speculation is mounting that the real’s slide may deepen, pushing up import prices and adding to the highest inflation rate in six years, if the central bank fails to provide dollars or deploy some of its $352 billion in reserves to defend the real. Concern policy makers’ surprise rate cut last month signals they are giving up on their goal of slowing inflation is compounding the real’s decline as Europe’s debt crisis erodes demand for emerging-market assets.

“The central bank is signaling it’s uncomfortable with the current foreign-exchange rate,” said Carlos Thadeu de Freitas Gomes Filho, chief economist with Franklin Templeton Investments in Brazil. “Other measures to defend the real may come.”

The decline in the real is a reversal of a 46 percent rally from the end of 2008 through August that prompted policy makers to buy dollars, raise taxes on bond investors and impose trading restrictions to stem the appreciation and protect exporters.

Rate Cut

Today the central bank accepted bids for 55,075 currency swaps of 112,290 on offer, according to a statement in the Sisbacen system. The real lost 0.9 percent to 1.8930 per U.S. dollar as of 4 p.m. New York time, from 1.8756 yesterday. The last time policy makers entered the derivatives market to weaken the dollar was in June 2009.

The central bank hasn’t bought dollars in the spot market since Sept. 13, breaking a practice it adopted since May 2009. It bought $47.6 billion in the first eight months of this year, surpassing the $41.4 billion it purchased in 2010. It last sold dollars on Feb. 3, 2009, when the real closed at 2.3052 per dollar.

The central bank declined to comment in an e-mailed statement.

Brazil sees no need to sell foreign reserves in the spot currency market at the moment because the economy still receives dollar inflows from export revenue, a government official said.

Market Liquidity

The central bank is ready to offer enough swap contracts to ensure adequate liquidity in the currency futures market, said the official, who asked not to be identified because he isn’t authorized to speak about the topic publicly.

The central bank intervention came as foreigners cut their bets on the real’s gain by 70 percent from a record high in July, according to data compiled by Bloomberg based on trading at BM&FBovespa SA, Latin America’s largest securities exchange. The bullish bets in the futures and dollar spread contracts, known as DDI, have dropped to $7 billion, the lowest level since August 2010, from $24.6 billion on July 7.

Brazil joined Turkey on Aug. 31 as the only Group of 20 nations to lower rates in the past two months to shore up growth. Central bank President Alexandre Tombini cut the benchmark interest rate a half point to 12 percent on Aug. 31, after raising it at the previous five policy meetings, citing a “substantial deterioration” in the global economy.


Consumer prices climbed 7.23 percent in the year through August, exceeding the 6.5 percent upper limit of the central bank’s target range for a fifth straight month. The bank targets inflation of 4.5 percent, plus or minus two percentage points.

“I used to think the Brazil story was bulletproof, but to me there have been a lot of cracks in the armor in the last six to nine months because of policy makers,” Win Thin, global head of emerging-markets currency strategy at Brown Brothers Harriman & Co. in New York, said in a telephone interview. “I couldn’t think it’s going toward a very pretty end.”

The dollar’s gains in recent days was a “normal” reaction to investor uncertainty about the European debt crisis, Finance Minister Guido Mantega told reporters in Washington today. Mantega accused the U.S., Japan and Europe last year of sparking a global “currency war” by keeping rates near zero.

President Dilma Rousseff urged world leaders yesterday to “impose controls on the currency war” before the Federal Reserve announced a plan to lengthen the maturities of its bond holdings to reduce borrowing costs.

Currency Swaps

The real reached 1.9549 per dollar earlier today, the weakest level since July 2009, before the central bank intervention. It fell to a six-year low against the Australian dollar and weakest level against the yen since March 2009. The 16 percent loss in the real this month doubles the drop in the Botswana pula and almost triples the decline in the euro.

The Turkish lira fell to an all-time low of 1.8474 per dollar yesterday.

Brazil’s central bank yesterday decided not to roll over reverse-currency swap contracts expiring in October, which will lead to the unwinding of $2 billion worth of bets against the dollar. It’s the first time policy makers refrained from renewing the contracts since January.

Yields on interest-rate futures due in January 2013 fell 10 basis points, or 0.1 percentage point, to 10.69 percent. The yields earlier rose to 10.96 percent, the highest level since Aug. 31, in part on concern that the currency slide will limit the room for the central bank to cut rates further.

Volatility Jumps

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries rose 26 basis points to 282, the highest level since July 2009, according to JPMorgan Chase & Co.

The cost of protecting Brazilian bonds against default climbed 23 basis points yesterday to a two-year high of 196, according to CMA. 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.

The real lost 24 percent in the three months through December 2008 after the collapse of Lehman Brothers Holdings Inc. froze global credits and Brazilian companies’ bets on the currency went awry. It touched a three-year-low of 2.6202 on Dec. 5, 2008.

Petrobras Earnings

“At these levels, I am not sure if the government is massively worried about this,” Roberto Melzi, a local markets strategist at Barclays Plc in New York, said in a telephone interview.

Almir Barbassa, chief financial officer of state-owned oil producer Petroleo Brasileiro SA, said in an interview in Rio de Janeiro yesterday that the currency’s slump may reduce profit this quarter as the cost of servicing dollar-denominated debt rises in local-currency terms. The state-controlled oil producer will likely book a financial loss, following a 2.9 billion-real ($1.5 billion) gain in the second quarter, should the Brazilian currency hold below 1.7 per dollar, Barbassa said.

A real weaker than 1.7 per dollar would add 0.5 percentage point to inflation over the next 12 months, said Zeina Latif, an economist at RBS Securities in Sao Paulo. Prices will rise 5.71 percent in the next 12 months and increase 5.5 percent next year, according to the median forecast in a Sept. 16 central bank survey of about 100 economists.

“Considering inflation seems to exceed the center of the target in 2012, it would be bad news,” Latif said in a telephone interview from Sao Paulo. “My fear is that this impact can be higher as the inflationary inertia increases. This is not a comfortable situation.”

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