Brazil Real Drops on Bets Intervention to Fail; Swap Rates Rise

Brazil’s real dropped on speculation the central bank’s four swap auctions this week won’t be sufficient to stop the currency’s decline.

The currency dropped 1.1 percent to 2.1564 per dollar. Yields on interest-rate futures due in January 2015 rose 24 basis points, or 0.24 percentage point, to 9.73 percent, the highest since April 2012. The central bank’s sale of currency swaps yesterday in two auctions followed the sale of $2.1 billion of the swaps the day before.

“The market will test the central bank’s willingness to intervene in the market again to support the real,” said Bernd Berg, emerging markets strategist at Credit Suisse AG, in a phone interview from Zurich. “If they don’t, I think the currency could fall to 2.20. The central bank would allow a slightly weaker real but wouldn’t let it fall to 2.30 immediately due to the negative impact it would have on inflation expectations.”

President Dilma Rousseff met yesterday with Finance Minister Guido Mantega as the selloff in the real threatened to push up import prices and add to an inflation rate that is already at the upper end of policy makers’ target range.

The annual rate of consumer price increases rose in May to 6.50 percent from 6.49 percent in the prior month, a government report showed last week. The lower end of policy makers’ target range is 2.5 percent.

Swap rates climbed higher and the real accelerated losses after Rousseff today announced 17 billion reais in subsidized credit lines to finance the purchase of furniture and appliances.

S&P Outlook

“Dilma’s comments were poorly received by the market,” Paulo Petrassi, a portfolio manager at Leme Investimentos, said by phone from Florianopolis. “She said the fiscal situation and inflation are under control. They’re not.”

Standard & Poor’s lowered the outlook on Brazil’s BBB rating to negative last week on concern that sluggish growth and weakening fiscal accounts will reduce the country’s ability to manage an external shock. The U.S.’s AA+ credit rating outlook was increased to stable from negative June 10 by S&P, citing receding fiscal risk.

The currency is too strong for Brazil’s exporters and hinders competitiveness, Robson Andrade, the president of the national industry confederation, known as the CNI, told reporters in Brasilia yesterday.

The real’s three-month implied volatility rose to an 11-month high of 14 percent today. That compares to 9.9 percent on May 22, when Federal Reserve Chairman Ben S. Bernanke said the Fed “could” scale back stimulus efforts if the employment outlook shows “sustainable improvement.”

“The money that was invested in emerging markets due to abundant liquidity is now returning to the country of origin,” said Hideaki Iha, currency trader at Fair Corretora, in a phone interview from Sao Paulo. “Volatility will continue until the Fed defines its actions.”

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