Brazilian Currency Rises From Four-Year Low After Tax Eliminated

Brazil’s real rose from a four-year low after the government removed a 1 percent tax charged on wagers against the dollar in a second easing this month of capital controls to stem the local currency’s rout.

The real appreciated 1.7 percent to 2.1212 per U.S. dollar after declining yesterday to 2.1564, the weakest level since May 2009. Today’s increase was the biggest since January 28 on a closing basis.

“The real should strengthen,” Daniel Cunha, the chief economist at XP Investimentos in Sao Paulo, said in a phone interview from Sao Paulo. “The magnitude and velocity will continue to be highly dependent on the dynamic abroad.”

The real is the second-worst performer among major currencies in the past three months on speculation the Federal Reserve will curtail a stimulus program that has supported the Latin American nation’s assets. Brazil is responding by unwinding capital controls that it began putting in place in 2010 to defend itself from policies of developed countries that Finance Minister Guido Mantega then characterized as a currency war.

President Dilma Rousseff’s administration removed the tax on dollar shorts in the futures market after four currency swap interventions this week failed to stem the real’s decline. The government is also creating an $8.7 billion credit line for low-income families. The levy’s elimination follows last week’s removal of the tax, known as IOF, on foreign investors who buy Brazilian bonds in the domestic market.

‘Greater Supply’

“With the dollar strengthening, it doesn’t make sense to keep this obstacle in place,” Mantega told reporters yesterday. “We are reducing the IOF so there will be greater supply of the dollar in the futures market.”

The real pared its decline over the past three months to 7.1 percent today, still the worst performance among 16 major currencies tracked by Bloomberg after the Australian dollar.

While the derivatives-tax cut will provide “some relief” for the real, it is still being hurt by waning confidence in the government’s policies, Eduardo Suarez, a Latin America currency strategist at Bank of Nova Scotia in Toronto, wrote in an e-mailed note to clients today.

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. Rousseff said yesterday in Brasilia that inflation and fiscal accounts are under control and that the poor should have access to credit.

Swap Rates

Swap rates on the contract due in January 2016 fell for the first time in seven days, dropping 26 basis points, or 0.26 percentage point, to 10.09 percent on eased speculation a weakening currency will spur the central bank to sustain the pace of increases in borrowing costs.

The central bank raised the target lending rate by 50 basis points on May 29 to curb inflation, surprising 38 of 57 analysts who expected policy makers would raise borrowing costs by 25 basis points for a second consecutive time. The benchmark was held at a record low 7.25 percent from October to March.

Annual inflation accelerated for nine straight months through March to 6.59 percent, above the top of the central bank’s target range of 2.50 percent to 6.50 percent. It eased to 6.49 percent in April and was 6.50 percent in May.

Retail sales climbed 0.5 percent in April from a month earlier, the national statistics agency reported today. The median forecast of 28 economists surveyed by Bloomberg was for an increase of 1.2 percent.

Currency Volatility

The real’s three-month implied volatility fell to 13.75 percent after rising yesterday to an 11-month high. The reading was below 10 percent before Fed Chairman Ben S. Bernanke said on May 22 that the central bank may scale back stimulus efforts if the U.S. employment outlook shows sustainable improvement.

“There’s volatility in currency markets at the moment purely because of uncertainty, with a lot of talk that quantitative easing will be tapered,” Jarratt Davis, a currency consultant at Smile Global Management, a unit of Independent Portfolio Managers Ltd., said in a phone interview from London. “But I don’t think they’re going to taper just yet because nothing has changed in terms of data. Once the market digests that, money that’s getting taken out of emerging markets will be put back in.”

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