Brazil’s Real Advances as Central Bank Scales Back Intervention

  • Brazil central bank reduced intervention to weaken currency
  • Emerging currencies drop after Fed’s Fischer signals rate hike

Brazil’s real advanced as the central bank scaled back efforts to weaken the currency for the second day, allowing it to extend a world-beating rally fueled by the highest interest rates among major economies.

The real gained 0.1 percent to 3.2007 per dollar on Monday in Sao Paulo after declining as much as 0.7 percent amid speculation that the U.S. will raise interest rates this year. An index of 20 emerging-market currencies weakened 0.5 percent.

Brazil’s policy makers sold 10,000 of reverse foreign-exchange swaps, equivalent to buying $500 million in the futures markets, on Friday and again Monday. The central bank had offered $750 million of the contracts daily since Aug. 11, after the real reached a one-year high. The bank scaled back its intervention after the real posted three straight days of declines last week, its longest losing streak in six weeks.

"The central bank response was quick and correct," said Italo Abucater, the head of currency trading at ICAP Brasil Ctvm in Sao Paulo. He said that investors continue to be lured by Brazil’s high interest rates of 14.25 percent -- more than 28 times the U.S. equivalent. Buying the real with borrowed dollars in a carry trade has returned 33 percent this year, the most among 42 currencies tracked by Bloomberg.

The real dropped earlier as traders were focused on Federal Reserve Vice Chairman Stanley Fischer’s remarks on Sunday that the U.S. economy is close to meeting the central bank’s goals and that growth will pick up. Investors are waiting for Fed Chair Janet Yellen’s speech scheduled for the end of the week to provide clearer signals on monetary policy.

"There is so much uncertainty over the Fed policy trajectory because they’ve been so intentionally ambiguous," said Sacha Tihanyi, a senior emerging-market strategist at TD Securities in New York. "I think many people are confused with Fed messaging currently."

Fischer’s remarks signaled that a 2016 rate increase is still under consideration. Investors see roughly 50-50 odds of a rate increase by year-end, according to the prices of futures contracts.

Swap rates on the contract maturing in January 2018, a gauge of expectations for Brazil’s interest-rate moves, rose 0.02 percentage point to 12.71 percent.

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