Brazil Real Weakens to 2 Per Dollar for First Time Since January

Brazil’s real dropped to 2 per dollar for the first time since January on speculation government intervention in the economy to spur flagging growth is prompting investors to withdraw money from the country.

The real slid 0.9 percent to 2.0082 per dollar at close in Sao Paulo, the weakest since Jan. 25. The decline was the biggest since Nov. 30. Swap rates on the contract due in January 2015 rose five basis points, or 0.05 percentage point, to 8.59 percent.

The level of 2 per dollar was last crossed in January, when the central bank intervened to strengthen the currency as inflation accelerated. Brazil had foreign currency outflows of $990 million in the week through March 15, the central bank reported yesterday.

“The flows are negative because Brazil has lost some appeal for foreign investors,” Sidnei Nehme, a director at NGO Corretora in Sao Paulo, which trades dollars with importers and exporters, said in a phone interview. “There are a lot of fund managers considering underweighting Brazil because of the inconsistency of monetary and fiscal policy.”

The long-term global local currency issuer rating of BNDES, the state development bank, was lowered yesterday to Baa2 from A3 by Moody’s Investors Service. The long-term global local currency deposit rating of state-run Caixa Economica Federal was also cut to Baa2 from A3.

Moody’s cited their participation in the government’s “countercyclical economic policies, which has resulted in significant growth rates of assets and loans, and leaner capital ratios.”

RBS View

Investors are testing whether the central bank will intervene if the real falls further as traders pare bets on increased borrowing costs, according to Flavia Cattan-Naslausky, a markets strategist at Royal Bank of Scotland Group Plc.

“The underperformance of the real reflects the contradictory policies of the government,” she said in a phone interview from Stamford, Connecticut. “The probability of a Selic increase in April diminished. It’s more probable there will be an increase in May.”

Minutes of the central bank’s March 5-6 meeting indicated that an increase in the Selic rate from a record low 7.25 percent wasn’t imminent as policy makers said “a cautious management of monetary policy” was needed. The monetary policy committee will next meet April 16-17 and May 28-29.

The real has pared its gain this year to 2.2 percent, the best performance among 16 major currencies tracked by Bloomberg after Mexico’s peso.

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 preventing excessive gains. The real closed at a 10-month high of 1.9442 per dollar on March 8 before the central bank intervened on March 11 to weaken it.

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