Brazil’s Real Rises for Fourth Straight Day on Swap Speculation

Brazil’s real gained for a fourth straight day, the longest stretch of advances since February, on speculation the central bank is prepared to auction more currency swaps to maintain the exchange rate.

“The central bank is holding a sword over the market’s head,” Alfredo Barbutti, economist at Liquidez DTVM Ltda., said in a phone interview from Sao Paulo. “If the real falls again, there could be new currency swaps.”

The real appreciated 0.2 percent to 1.9830 per dollar at 6 p.m. in Sao Paulo and pared its drop this year to 5.9 percent, still the worst performance among the 16 most-traded currencies tracked by Bloomberg. It touched 2.1062 on May 23, the weakest level since May 2009.

The central bank sold 14,000 out of the 40,000 currency swap contracts on May 25 in a fourth straight day of swap sales. The swap sales, which came as Europe’s debt turmoil dimmed the prospects for Brazilian assets, are a reversal from last month’s policy of stepped-up dollar purchases aimed at weakening the real to help exporters. Policy makers bought $7.2 billion in the spot market in April, the most since purchases of $8.4 billion in March 2011.

Yields on Brazilian interest-rate futures increased on speculation the central bank will slow the pace of reductions in borrowing costs. The yield on the futures contract due in January rose three basis points, or 0.03 percentage point, to 8.07 percent.

Rate Cuts

Economists cut their estimates for inflation and economic growth this year in a weekly survey published today as the government cut taxes and reserve requirements in a bid to boost car loans and speed up the expansion. Inflation will end the year at 5.17 percent while the economy will grow 2.99 percent, according to the survey.

Policy makers will lower the benchmark rate, known as Selic, 50 basis points to a record 8.5 percent at a May 30 meeting, according to the median estimate of 39 economists in a Bloomberg survey. The central bank has lowered the rate 350 basis points since August.

Investor concern that fiscal stimulus could fuel inflation is also pushing up yields on rate futures, Barbutti said.

Brazil may reduce this year’s primary budget surplus target, which excludes interest payments on debt, to as low as 2.5 percent of gross domestic product from the current 3.1 percent to bolster growth, O Estado de S. Paulo reported, citing government officials it didn’t identify.

A Finance Ministry official declined to comment on the report.

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