Brazil Real Drops on Speculation Central Bank to Allow Declines

Brazil’s real fell for a sixth day in the longest stretch of losses this year on speculation the central bank will allow further declines after a report indicated deflation in Sao Paulo.

The real depreciated 0.2 percent to 2.0173 per U.S. dollar in Sao Paulo after earlier rising 0.5 percent. Swap rates due in January 2015 climbed one basis point, or 0.01 percentage point, to 8.52 percent. They earlier fell three basis points.

“The central bank hasn’t given any signal that it will intervene,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil, said in a phone interview from Sao Paulo.

Sao Paulo’s consumer prices decreased 0.18 percent in the four weeks through March 23, the Foundation Economics Research Institute reported today. That compares with a 0.11 drop in the period ended March 15.

Deputy Finance Minister Nelson Barbosa told reporters in Brasilia today that the currency’s volatility is too low to affect inflation. The country maintains a floating exchange rate, he said.

“Barbosa’s comments could have given the market more freedom to depreciate the real,” Joao Paulo de Gracia Correa, currency manager at Correparti Corretora, said in a phone interview from Curitiba, Brazil.

Minutes of the central bank’s March 5-6 meeting showed that an increase in the target lending 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.

Weaker Real

The real traded weaker than 2 per dollar for a fourth day on speculation government intervention in Latin America’s largest economy to spur flagging growth is prompting investors to withdraw money from the country. The currency last crossed the level in January, when the central bank stepped in to strengthen the currency as inflation accelerated.

Central bank President Alexandre Tombini said last week that policy makers were ready to intervene in the foreign-exchange market to avoid excessive volatility.

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.

China Accord

China and Brazil signed an agreement to set up a swap line of about $30 billion in their respective currencies to support bilateral trade in case a credit crisis arises. The currency swap is worth 190 billion yuan or 60 billion reais, the People’s Bank of China said on its website today.

The leaders of Brazil, Russia, India, China and South Africa were poised to approve the establishment of a development bank during an annual summit that began today in the South African city of Durban, officials from all five nations said.

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