Brazil Real Drops on Inflow Concern; Swap Rates at 7-Week High

Brazil’s real posted the the biggest weekly drop since mid-December as signs of muted growth in Europe and concern about intervention in the currency market fanned speculation inflows into the country will diminish.

The real depreciated 0.4 percent this week to 2.0414. It fell 0.1 percent to today. Swap rates on the contract due in January 2015 rose one basis point, or 0.01 percentage point, to 7.88 percent, the highest level since Nov. 29. The yield is up 15 basis points this week.

The real fell with most emerging-market currencies as an unexpected drop in U.K. retail sales signaled slowing growth and sapped demand for higher-yielding assets. Government intervention in the currency market and reduced forecasts for global expansion have spurred concern among investors that there will be less money flowing to Brazil this year, said Reginaldo Galhardo, a currency trader at Treviso Corretora.

“As long as investors don’t see bigger inflows, they won’t be comfortable buying reais,” Galhardo said in a telephone interview from Sao Paulo. “The data in Europe is weighing on the market.”

Policy makers forecast the world’s biggest emerging market after China expanded 1 percent in 2012, or about half the pace of the U.S and Japan, according to surveys conducted by Bloomberg.

Brazil’s central bank swung in 2012 between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by keeping the real from strengthening beyond 2 per dollar.

Real Gains

The real has gained 1.4 percent since Dec. 20, when Carlos Hamilton, the central bank’s director for economic policy, said officials consider an exchange rate of 2.05 per dollar as more “adequate” when creating economic forecasts than 2.10.

The central bank sold currency swaps in November and December to stem the real’s declines. From August through October, the bank sold reverse currency swaps to keep the real weaker, supporting exporters.

Brazil’s swap rates traded at a seven-week high on speculation quickening inflation will force central bankers to abandon their pledge to keep borrowing costs at a record low.

The central bank left the target lending rate at a record low 7.25 percent this week after reducing it 5.25 percentage points through October. The balance of risks for inflation worsened in the short term as the domestic recovery was “less intense” than expected, the monetary policy committee said in its statement after a two-day meeting, which concluded Jan. 16.

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