Brazil’s Real Drops as Swap Sale Outweighs Impeachment Hoopla

Brazil Expecting Rate Cuts in Second Half: Santos
  • Central bank offers $1 billion in contracts to curb rally
  • Real briefly trims loss as Meirelles named finance minister

Brazil’s real led losses among its major global peers after the central bank’s efforts to weaken the currency overshadowed the Senate’s decision to suspend President Dilma Rousseff from office amid a widening corruption scandal.

The real halted a two-day rally as the monetary authority sold 20,000 in reverse swaps, a move equivalent to buying $1 billion in the futures market. The sale overshadowed the Senate vote to push forward with an impeachment trial on allegations Rousseff illegally doctored fiscal accounts to mask the size of the budget deficit. The currency briefly trimmed part of its slide as Brazil’s new acting President Michel Temer appointed Henrique Meirelles, a former Wall Street banker, to head his economic team.

“All this optimism with the impeachment vote would probably cause the currency to advance to a level the central bank is not comfortable with,” said Camila Abdelmalack, the chief economist at brokerage CM Capital Markets in Sao Paulo. “That’s why it had to act to hold the real down.”

The real has climbed the most among about 150 currencies worldwide this year on bets that a new government would pull Latin America’s largest economy out of its worst recession in a century and revive the nation’s finances. While the rally was a sign of confidence by investors, it also added to concern that the nation’s exports could be hampered. That’s propelled the central bank to limit the currency’s appreciation, by selling $41.8 billion in reverse swaps since March 21.

The real fell 0.9 percent to 3.4830 per dollar on Thursday, after gaining 1.8 percent in the previous two days. The cost of hedging Brazil’s sovereign debt against losses using five-year credit-default swaps dropped to the lowest since August, while dollar bonds due in 2025 advanced.

The intervention in the currency market was a turnaround in policy after the monetary authority used swaps from June 2013 until March 2015 to help bolster the real, which lost a third of its value last year. The central bank will work to keep the currency from appreciating much past 3.5 per dollar as the change in government lures investors, BNP Paribas said last week. On average, the analysts surveyed by Bloomberg forecast the currency will weaken to 3.82 per dollar this year..

In addition to the central bank’s intervention, the real also fell as some of the world’s largest financial institutions said that the task of fixing what ails Brazil won’t be easy. Shoring up the budget requires the approval of unpopular measures against a backdrop of a very weak economy and rapidly deteriorating labor-market conditions, Alberto Ramos, the chief Latin America economist at Goldman Sachs Group Inc., wrote in a note to clients.

“The political cost of putting the house in order may sometimes be higher than one could even imagine,” said Pablo Jaque Sahr, an investment manager at AGF Security SA in Santiago, whose $104.6 million fixed-income fund focused in Brazil delivered the best performance among 879 peers tracked by Bloomberg. “The question is -- how much of those changes in Brazil would already be factored into prices?”

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