Brazil Real Drops From 10-Month High as Central Bank Intervenes

Brazil’s real fell from a 10-month high after the central bank sold $1 billion of reverse foreign-exchange swaps to weaken the currency.

The real depreciated 0.7 percent to 1.9569 per U.S. dollar at the close of trading in Sao Paulo after rallying on March 8 to 1.9442 per dollar, the strongest level on a closing basis since May 8. The currency has strengthened 4.8 percent this year, the biggest gain among 25 emerging-market counterparts tracked by Bloomberg. Swap rates due in January 2014 fell 11 basis points, or 0.11 percentage point, to 7.85 percent today.

“The 1.94 per dollar area seems to be the line in the sand for the central bank,” Bernd Berg, an emerging-markets strategist at Credit Suisse Group AG in Zurich, said in an e-mailed response to questions. “Over the medium and long term, it will let the currency rise further below 1.94 per dollar, but in the early stages of the economic recovery, a real appreciating too rapidly would, in the eyes of the central bank, damage the recovery of the export industry.”

The real rallied March 8 on speculation policy makers would let the currency appreciate to contain inflation. The government had reported that its IPCA index of consumer prices climbed 6.31 percent in February from a year earlier, the highest annual rate in 14 months. The central bank sold 20,000 of 30,000 reverse currency contracts offered today in the first auction of its kind since Feb. 15.

Swap Rates

Swap rates fell today after President Dilma Rousseff announced last week cuts in taxes on food staples to curb inflation, reviving speculation that the central bank will refrain from increasing borrowing costs.

Eliminating the 9.25 percent PIS/Cofins taxes will rein in prices and stimulate the economy as Brazilians are able to save and consume more, Rousseff said in a televised address March 8. The measure will cut tax revenue by 7.3 billion reais annually.

“The government is taking action so that the inflation outlook doesn’t get much worse,” Gustavo Rangel, the chief economist for Latin America at ING Group, said in a telephone interview from London.

Policy makers dropped last week a pledge to keep borrowing costs unchanged for a “prolonged period” from their statement accompanying the decision to leave the target lending rate at a record low 7.25 percent.

Economists cut their 2014 economic growth forecasts in a survey published today. Gross domestic product will expand 3.50 percent next year, according to the median estimate of about 100 analysts surveyed by the central bank, down from the prior projection of 3.65 percent.

Currency Policy

The central bank has swung between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by preventive excessive gains.

Brazil pushed the real down 9 percent in 2012 and 11 percent in the prior year as Finance Minister Guido Mantega said developed economies were debasing currencies such as the dollar while driving up those of emerging nations.

Stabilizing the real at a level that allows industry to “survive” has put Brazil on the path to recovery following two years of slowing economic growth, Mantega said in an interview last month in New York.

“We haven’t resolved it, but we neutralized, softened the currency war issue that other countries are facing,” Mantega said. “We are in Brazil in a transition to a more solid, competitive and efficient economy.”

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