Brazil’s Real Declines Ahead of Central Bank Currency Fixing

  • Currency heading for a monthly decline, after rising 12% June
  • Central bank intervenes in market with reverse FX swap sale

Brazil’s real dropped amid speculation banks are buying dollars in an attempt to control a central bank rate used in settling some financial contracts.

The real declined 0.9 percent to 3.2918 per U.S. dollar on Thursday. The currency is on course for a 2.4 percent monthly decline, after having risen 12.4 percent in June. Brazil’s central bank placed all 10,000 reverse swaps contracts offered in an auction this morning, a move equivalent to buying $500 million in the futures market, which also tends to weaken the real.

The central bank currency rate, known as Ptax, is calculated every business day based on data collected from banks and brokerages, but the last day of the month becomes a reference for the settlement of many derivative contracts in Brazil’s local market. Some banks might have bet the real would be trading at a weaker level this month, so it’s in their interest to try to cheapen the local currency before tomorrow, which is the last day this month, according to Joao Paulo de Gracia Correa, the head of foreign currency at brokerage SLW in Curitiba.

"The market is positioning for the the end-of-the-month Ptax," said Correa. "Investors might also be on the defensive while awaiting data regarding the government tax collection and deficit."

Brazil posted a narrower-than-forecast budget deficit before interest payments in June as Finance Minister Henrique Meirelles seeks to control government spending and restore investor confidence in Latin America’s largest economy. The central government recorded a so-called primary budget deficit of 8.8 billion reais ($2.7 billion), less than the median estimate for a 14.5 billion-real gap from 21 analysts surveyed by Bloomberg.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest rates, rose 0.07 percentage point to 12.91 percent.

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