Brazilian Real Falls as Tax Removal Not Enough; Swap Rates Jump

Brazil’s real posted the biggest decline in emerging markets after the government’s interventions this week failed to staunch capital outflows triggered by faltering economic growth and a jump in U.S. bond yields.

The real fell 1.4 percent to 2.1516 per dollar, the worst performance today among major developing-nation currencies tracked by Bloomberg. It has lost 0.9 percent this week and plunged 7 percent since the end of April. Swap rates due in January 2015 jumped seven basis points, or 0.07 percentage point, to 9.57 percent after central bank President Alexandre Tombini told Valor Economico there’s no limit on interest-rate increases.

While the currency rebounded from a four-year low yesterday after the government removed a 1 percent tax charged on wagers against the dollar, the gains proved short-lived as speculation the U.S. Federal Reserve will pare back monetary stimulus lured money away from Latin America’s biggest economy. The Federal Open Market Committee meets next week and will release its forecasts for the unemployment rate, growth, inflation and interest rates.

“Until the Fed meeting, the market is going to be more volatile,” Joao Paulo de Gracia Correa, the head of currency trading at Correparti Corretora, said by phone from Curitiba, Brazil. “The broader trend is the government’s intention to bring more stability to the currency and keep it below 2.15 per dollar, to not impact inflation.”

The derivatives tax removal, the second step taken this month to loosen capital controls, followed central bank currency swap auctions that sought to stem the real’s slide.

Swap Rates

The International Monetary Fund today said it sees the Federal Reserve maintaining large monthly bond purchases until at least the end of this year and urged the central bank to carefully manage its exit plan to avoid disrupting financial markets.

Swap rates on the contract due in January 2015 rose as much as 19 basis intraday after Tombini said in an interview with Valor that the central bank “will do what needs to be done” to ensure inflation ends 2013 below last year’s 5.84 percent pace.

Annual inflation accelerated for nine straight months through March to 6.59 percent, exceeding the upper end 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.

Brazil Inflation

Brazil’s June IGP-10 inflation index, which monitors prices from the 11th day of the previous month to the 10th day of the current month, rose 0.63 percent, compared to a decline of 0.09 percent in May, the Getulio Vargas Foundation said today. The median estimate in a Bloomberg survey of economists was for a 0.45 percent increase. The IGP index is composed of producer prices, consumer prices and construction costs.

The Washington-based IMF left its U.S. growth forecast for this year unchanged at 1.9 percent, and lowered its prediction for 2014 to 2.7 percent, from 3 percent growth predicted in April, according to its annual report on the U.S. economy.

Brazil’s economy expanded 0.9 percent last year and will grow 2.53 percent in 2013, according to the median forecast of about 100 analysts surveyed by the central bank. They had projected an expansion of 2.77 percent the week before.

Rousseff’s administration yesterday eliminated a tax on futures-market bets against the dollar. Last week, the government removed a tax known as IOF on foreign investors who buy Brazilian bonds in the domestic market. The government is also creating an $8.7 billion credit line for low-income families.


“Although we have seen some positive signs out of the government, the fact is that the actions were reactive rather than proactive,” said Eduardo Suarez, Latin America currency strategist at Scotiabank in Toronto, in an e-mailed report to clients. “We do not believe that they have been enough to reverse the sentiment deterioration towards management of economic policy.”

The real’s three-month implied volatility fell to 13.6 percent after rising June 12 to an 11-month high of 14 percent. The reading was below 10 percent before Fed Chairman Ben S. Bernanke said on May 22 that policy makers may scale back stimulus efforts if the U.S. employment outlook shows sustainable improvement.

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