Brazil Real Trades Stronger Than 2 Per Dollar

Brazil’s real traded stronger than 2 per dollar for a third day as the central bank offered greenbacks to support the currency, offsetting Finance Minister Guido Mantega’s view that the government is ready to stem gains.

The currency pared its drop as the central bank auctioned $1.27 billion of foreign-exchange credit lines at an auction with a repurchase date of April 1 and a maximum rate of 2.005795 per dollar. The real depreciated 0.1 percent to 1.9887 per dollar at the close in Sao Paulo after earlier weakening as much as 0.7 percent to 1.9999.

“The government isn’t giving clear signals on what the exchange-rate regime is,” Marcelo Fonseca, an economist at M Safra & Co. in Sao Paulo, said in a phone interview. “Is it floating or administered within a currency band? It has to be one or the other.”

Mantega commented in Brasilia after the real rallied beyond 2 per dollar on Jan. 28 for the first time in almost seven months. The central bank moved that day to boost the currency by selling $1.85 billion of foreign-exchange swap contracts as inflation accelerated. That intervention prompted Credit Suisse Group AG and Royal Bank of Scotland Group Plc to project that policy makers are allowing the currency to float within a stronger band.

Policy makers may be willing to allow the real to further appreciate to 1.98 per dollar in the short term to ease inflation as long as the currency’s gains aren’t too fast, Flavia Cattan-Naslausky, a markets strategist at RBS, said yesterday by e-mail. Credit Suisse boosted its forecast for the real to 1.94 in 12 months from 2.03, analyst Bernd Berg wrote yesterday in a report.

No Demand

The bank received no demand for the foreign-exchange credit lines it auctioned today, an official with knowledge of the auction said. It offered the dollars today to roll over similar contracts that will expire Feb. 1, said the official, who asked not to be identified because he is not authorized to speak publicly on the matter.

The drop in the real today pared its gain in January to 3.2 percent, still the biggest among the major Latin American currencies tracked by Bloomberg.

Mantega said today the exchange rate isn’t an instrument to control prices and a weaker currency helps to protect the domestic industry from foreign competition.

Policy makers 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.

Fuel Prices

Yields on interest-rate futures contracts rose for the first time in three days as Petroleo Brasileiro SA said it would increase fuel prices and a report showed inflation slowed less than forecast, increasing pressure on policy makers to lift borrowing costs.

Petrobras, as Brazil’s state-controlled oil company is known, said in a regulatory filing that it will raise gasoline prices at refineries by 6.6 percent and diesel by 5.4 percent. The company also said it is seeking to eliminate the discount between domestic and international prices.

“The gasoline prices increase inflation worries,” Ures Folchini, the head of fixed income at Banco WestLB do Brasil, said by phone from Sao Paulo.

The IGP-M inflation index of producer, consumer and construction prices rose 0.34 percent in the month through Jan. 20 after a previous 0.68 percent gain, the Getulio Vargas Foundation reported. The median forecast of economists surveyed by Bloomberg was for a 0.32 percent increase.

Swap rates on the contract due in January 2015 climbed four basis points, or 0.04 percentage point, to 7.91 percent.

Inflation Target

Annual inflation has exceeded the 4.5 percent midpoint of the central bank’s target range for 28 consecutive months. The IPCA index of consumer prices rose 5.84 percent in December from a year earlier after increasing 5.53 percent in the prior month, the national statistics agency reported Jan. 10.

The outlook for inflation is getting worse in the “short term” while the recovery of domestic activity was less intense than expected, the central bank said in minutes of its Jan. 15-16 policy meeting published last week.

The best way to curb consumer price increases is to keep the target rate at a record low for a “sufficiently prolonged period,” policy makers said. The board held its benchmark at 7.25 percent for a second straight meeting.

Before it's here, it's on the Bloomberg Terminal.