Brazil’s real advanced after policy makers intervened following a plunge in the currency last week to a three-year low on slower-than-forecast third-quarter economic growth.
The real gained the most in a week after the central bank sold $2.1 billion in currency swaps in two auctions today. The bank also offered as much as $5 billion with an agreement to repurchase the U.S. currency later to boost liquidity. Swap rates dropped on speculation policy makers will keep borrowing costs at a record low through the first half of 2013 after a Nov. 30 report showed that Latin America’s biggest economy grew at half the pace analysts had projected.
The currency appreciated 0.6 percent to 2.1235 per dollar at the close in Sao Paulo, the most since Nov. 23. It dropped on Nov. 30 to 2.1360, the weakest since May 2009. Swap rates on contracts due in January 2014 fell four basis points, or 0.04 percentage point, to 7.17 percent.
“With the weak GDP outlook, there has been pressure on the real,” Bernd Berg, emerging-markets strategist at Credit Suisse Group AG, said in a phone interview from Zurich. “They don’t want the real to depreciate too quickly.”
Policy makers have oscillated between selling reverse currency swaps to protect exporters by keeping the real from strengthening and selling currency swaps aimed at preventing the real from depreciating too quickly and creating inflationary pressure, Eduardo Suarez, a senior currency strategist at Scotiabank in Toronto, said in an e-mailed report. The central bank may try to keep the real in a range of 2.05 to 2.15 per dollar, he wrote.
The central bank sold 41,800 currency swap contracts due in January in two auctions today to stem the real’s losses. On Nov. 23, it sold $1.6 billion in currency swaps in the first use of the instrument since auctions from May 18 through June 29. From August through October, the bank sold reverse currency swaps to keep the real weaker than 2 per dollar and make exporters more competitive. The currency traded in a range of 2 per dollar to 2.1 per dollar from July 4 through Nov. 21.
To promote liquidity, the central bank sold dollars today in two credit line auctions. The first auction had a threshold of 2.122450 and the second had a price threshold of 2.132400, the bank said in an e-mailed statement. Policy makers last held such an auction in December 2011. The bank is trying to improve liquidity as end-of-year company remittances squeeze the supply of dollars. The central bank rejected all dollar bids in its 2011 auction.
Brazil’s economy will grow 1.27 percent this year and 3.70 percent in 2013, according to the median estimate in a central bank survey of about 100 analysts published today. It was the biggest single-week reduction in 2013 growth forecasts all year. In the previous week’s survey, analysts forecast GDP to expand 1.50 percent in 2012 and 3.94 percent next year.
Growth domestic product increased 0.9 percent in the third quarter from a year earlier, the statistics agency said Nov. 30, trailing the 1.9 percent median forecast of economists surveyed by Bloomberg.
The central bank left Brazil’s target lending rate at a record low 7.25 percent last week, snapping a streak of 10 reductions as they tried to stoke growth in an economy forecast to expand at the slowest pace in three years. They pledged to keep monetary conditions stable for a “prolonged period,” according to a statement accompanying the rate decision.
President Dilma Rousseff’s government has cut taxes and boosted spending over the past 12 months to prop up the economy. While the efforts are keeping retail sales buoyant amid a global slowdown, companies are holding back on investment and industrial production contracted in September for the first time in four months.
Cuts in GDP forecasts are a signal the central bank will keep borrowing costs low for a prolonged period and could even cut rates before raising them, Credit Suisse’s Berg said. The bank revised down its 2012 GDP forecast to 1.1 percent last week, from a previous projection of 1.5 percent.
“It looks unlikely the central bank will increase rates anytime soon,” Berg said. “The stimulus is working and it’s the right stimulus but it takes time. Brazil’s economy is driven strongly by domestic demand and credit and now you’re repositioning for more growth in investment, exports. That restructuring of the economy takes time.”