Real Rallies as Brazil Loosens Capital Controls to Boost Economy

The real rose the most since June as Brazil further loosened capital controls to support economic growth that was less than half the pace forecast by analysts in the third quarter.

The currency advanced 1.5 percent to 2.0879 per U.S. dollar at the close in Sao Paulo, the biggest advance since June 29. The real climbed the most among 25 emerging-market currencies. Swap rates on contracts due in October 2014 fell two basis points, or 0.02 percentage point, to 7.41 percent.

The real extended its gain after a central bank official said in an interview that policy makers considered the currency’s drop excessive. Brazil reduced today the maturity of foreign loans subject to a 6 percent tax to one year from two years after announcing yesterday it would exempt exporters from the same level of tax on some borrowing.

“The government seeks to establish liquidity in the exchange-rate market,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil, said in a phone interview from Sao Paulo. “The measures today are more potent than those yesterday and are having a bigger impact.”

Policy makers maintain that the real has weakened to a level that doesn’t correspond to the country’s economic fundamentals, said the central bank official, who asked not to be identified because he is not authorized to discuss the matter publicly. Traders wrongly bet that the government is working to keep the exchange rate within a determined range, the official said in an interview.

Brazil’s Intervention

Policy makers intervened in the currency market on Dec. 3 to stem the real’s decline after it closed last week at a three-year low.

The currency tumbled after the statistics agency reported Nov. 30 that gross domestic product increased 0.9 percent in the third quarter from a year earlier, trailing the 1.9 percent median forecast of economists surveyed by Bloomberg.

The real is at a level where Finance Minister Guido Mantega projects that the government won’t need to take measures that affect market prices.

“There are now more conditions in place for the market to establish the exchange rate,” Mantega said in an interview in Brasilia yesterday. “We’ll allow the exchange rate to float. With lower interest rates, capital flows decelerate. There is already room for the market to regulate itself more.”

‘Currency War’

Mantega used the term “currency war” in 2010 to describe the use of monetary policy by developed countries such as the U.S. to boost exports. That year, Brazil introduced taxes on capital flows to weaken the real.

Policy makers have swung in 2012 between selling currency swaps aimed at preventing the real from depreciating too quickly and selling reverse currency swaps to protect exporters by keeping the real from strengthening.

The central bank sold $2.1 billion in currency swaps in two auctions on Dec. 3 and $1.6 billion in a Nov. 23 offering to stem the real’s declines. From August through October, the bank sold reverse currency swaps to keep the real weaker than 2 per dollar and make Brazil’s exporters more competitive.

The unwinding of capital controls and currency swap auctions are a signal the government is pursuing an exchange rate of 2.1 per dollar, Banco BNP Paribas Brasil SA analysts Diego Donadio and Thiago Alday said today in a research note.

“While a weaker real is supportive of the domestic industrial sector, a fast pace of depreciation is clearly a threat to the inflation outlook,” the analysts wrote. “The government will act to assure a stable exchange rate.”

Industrial Output

Industrial production increased 0.9 percent in October from a month earlier, the national statistics agency reported yesterday. The median estimate of economists surveyed by Bloomberg was for 1.2 percent growth.

Swap rates fell on reduced concern that a falling real may cause inflation to accelerate and force policy makers to begin boosting borrowing costs.

“The market still considers the government as yearning for a depreciated real, but with a gradual depreciation,” Rostagno said.

Since August 2011, the central bank has reduced the benchmark interest rate by 5.25 percentage points to a record 7.25 percent. Traders use interest-rate swaps to bet on the direction of borrowing costs.

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