Brazil Real Leading Emerging-Market Drop After Reverse-Swap Sale

  • Emerging market currencies decline after U.S. Fed signal
  • Brazil mid-march inflation slows more than all forecasts

Brazil’s real dropped the most among emerging-market peers as the central bank extended its intervention to weaken the currency, a switch announced last week after three years in which policy makers worked to support the real.

The central bank auctioned 17,000 foreign-exchange reverse swap contracts on Wednesday, equivalent to buying dollars in the futures market, and said it will reduce rollover auctions of contracts that bolster the currency to 2,500 contracts a day from 3,600 previously. The real lost 2.8 percent to 3.6849 per dollar, the most among 24 emerging-market currencies tracked by Bloomberg.

Central bank policy makers are looking to damp the real’s appreciation after it climbed 9.4 percent against the dollar this year through Friday, more than any other major currency in the world, as the drive to impeach President Dilma Rousseff gained momentum. A weaker real helps exporters by making their goods cheaper in dollar terms, potentially offering a lifeline to companies and an economy suffering from the country’s worst recession in more than a century. The currency plunged 33 percent last year.

"Investors are becoming convinced the central bank intends to tackle the exaggerated appreciation of the real, that the move in recent weeks has a limit," said Camila Abdelmalack, the chief economist of brokerage CM Capital Markets in Sao Paulo. "The strong appreciation of the dollar is also weighing on the real and political developments in Brazil should keep the currency volatile."

Traders dumped higher-yielding currencies worldwide after Chicago Fed President Charles Evans said two interest rate increases this year wouldn’t be unreasonable, joining other officials who have said this week they expect to raise rates more aggressively than traders had been pricing in. A gauge of emerging-market currencies dropped 0.7 percent.

The real extended losses after a news report on Uol website’s showed documents seized from construction company Odebrecht with alleged bribes for more than 200 politicians.

"There are so many names in the list, spreading concerns that politicians from all sides are involved. It seems like no one is actually safe," said Reginaldo Galhardo, a foreign-exchange manager at Treviso Corretora de Cambio in Sao Paulo. "This generates more tension in the market."

Brazilian swap rates on the contract maturing in January 2017, a gauge of expectations for interest rates, rose 0.01 percentage point to 13.72 percent.

A gauge of consumer-price increases slowed more than analysts forecast in the month through mid-March. Inflation, as measured by the IPCA-15 index, decelerated to 0.43 percent from 1.42 percent a month earlier, the national statistics agency said Wednesday. That compares with the median estimate from 37 analysts surveyed by Bloomberg for a 0.54 percent increase. Annual inflation slowed to 9.95 percent from 10.84 percent.

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