Brazil Currency Advances as Policy Makers Seek to Restore Calm

  • Country's government continues to pursue surplus goal for 2015
  • One-month implied volatility rises to highest in four years

Brazil’s real rose after the government said it is ready to face any crisis while the central bank stepped up support for the currency following a rout that sent it to a record low last week.

The real advanced 1.2 percent to 4.0620 per dollar in Sao Paulo after earlier falling as much as 1 percent. The currency extended its gains after Treasury Secretary Marcelo Saintive said officials are working to shore up the budget and calm markets.

A measure of volatility for the currency surged to the highest in four years Tuesday as investors weighed the government’s reassurances against concern that the country may face further credit-rating downgrades amid a political stalemate and a corruption investigation at the state-controlled oil company.
The real has tumbled 7 percent since Standard & Poor’s cut the nation to junk Sept. 9 as President Dilma Rousseff’s proposals for spending cuts and tax increases fail to win support, with lawmakers saying they’ll burden middle-class Brazilians already suffering from a recession and inflation.

"Intervention is needed to temper the volatility in the market and help the real keep its head above water," said Ipek Ozkardeskaya, a markets analyst at London Capital Group Ltd.

The central bank sold 20,000 foreign-exchange swap contracts earlier Tuesday worth $987.6 million and offered $2 billion in credit lines to support the real. Officials resumed new sales of the instruments Sept. 23 after ending a similar program in March.

One-month implied volatility on the real rose to 28.1 percent, the highest since September 2011. Swap rates on the contract maturing in January 2017, a gauge of expectations on interest-rate moves, declined 0.25 percentage point to 15.90 percent. They reached as high as 16.75 percent earlier in the day, after Brazil’s broadest measure of price increases accelerated to a five-month high.

Fitch Ratings, which classifies Brazil two steps above junk, said Monday that a downgrade may come at any time as the country’s economic data worsens faster than forecast. The country has structural problems that impede growth, and its debt as a percentage of the economy is likely to climb, analyst Rafael Guedes told reporters in Sao Paulo.

Moody’s Investors Service ranks the country at the lowest investment grade.

Brazil’s central government posted a budget deficit of 5.1 billion reais in August, according to the Treasury. That is lower than the 7.1 billion reais gap in July and less than half the 10.7 billion deficit forecast by 22 economists surveyed by Bloomberg.

Inflation in Latin America’s largest economy is running at more than double the official target, as the currency loses value and pushes up the price of imports. The central bank ended its monetary tightening cycle this month, holding interest rates at their highest since 2006. Even so, traders are betting the monetary authority will be forced to tighten further.

With price pressures high and still rising, the central bank "will find it difficult to keep rates steady," Win Thin, head of emerging-markets strategy at Brown Brothers Harriman & Co. wrote in a note to clients.

Markets are pricing in rate hikes that would take benchmark borrowing costs to 16.5 percent by mid-2016, Thin wrote.

"Much of that reflects risk premia, but part of it should reflect a deteriorating inflation outlook as the real weakens," he wrote.

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