Brazil Real Falls to Four-Year Low on Fed, Sparking Intervention

Brazil’s real dropped to a four-year low, prompting the central bank to intervene for a third day this week to stem the selloff after the U.S. Federal Reserve signaled yesterday that it may taper monetary stimulus.

The currency slid for a fifth day, depreciating 1.5 percent to 2.2575 per U.S. dollar, the weakest on a closing basis since April 2009. The real and the Mexican peso are the worst performers in the past month among 24 emerging-market dollar counterparts tracked by Bloomberg. The Ibovespa equity index rose 0.7 percent today after sinking into a bear market on June 11. Mexico’s IPC tumbled 3.9 percent.

The real extended its one-month decline to 9.6 percent, which would be the biggest since September 2011. The currency pared its drop today as the central bank sold $2.99 billion of foreign-exchange swap contracts in the seventh day of intervention in three weeks. It also offered $3 billion at two auctions of currency credit lines.

“It’s very hard to actually impact the currency on a sustainable basis,” Eduardo Suarez, a Latin America strategist at Bank of Nova Scotia, said in a phone interview from Toronto. “As long as they keep doing swaps, I think they can slow it but not stop it. They face a really challenging situation.”

Fed Chairman Ben S. Bernanke said yesterday that policy makers may start winding down the pace of asset purchases later in 2013 and may end them around the middle of next year. Risks to the outlook for the U.S. economy and the labor market have diminished, the Federal Open Market Committee said yesterday at the conclusion of a two-day meeting in Washington.

Treasury Buybacks

Brazil’s Treasury bought back local fixed-rate and inflation-linked bonds today to bolster demand for the securities amid a market rout fueled by the speculation the Fed will pare back stimulus. Today’s repurchase offer was the third unscheduled one in a week. Yesterday’s auction produced no buybacks, the Treasury said.

The Treasury said it bought back 239,000 inflation-linked NTN-Bs, 600,000 fixed-rate NTN-Fs and 402,500 fixed-rate LTNs, The government will offer to repurchase more bonds tomorrow.

Yields on fixed-rate bonds due in 2023, among the securities the Treasury is offering to buy, have soared 1.35 percentage points this month to 11.88 percent, the highest level since Brazil began selling them last year.

“The Treasury is doing its best to calm the market,” Ricardo Tibau, a fixed-income trader at Renascenca DTVM, said in a phone interview from Sao Paulo.

Moody’s View

Lackluster growth and rising debt levels in Brazil are making it “more difficult to support” the positive outlook on the nation’s Baa2 credit rating, Mauro Leos, senior credit officer at Moody’s Investors Service, said yesterday in a phone interview from New York. Standard & Poor’s cut the outlook on its equivalent BBB rating for Brazil to negative on June 6.

Swap rates due in January climbed 10 basis points, or 0.10 percentage point, to a 14-month high of 9.10 percent today on speculation that a weakening real will spur the central bank to maintain the pace of increases in borrowing costs.

Annual inflation accelerated for nine straight months through March to 6.59 percent, exceeding the upper end of the monetary authority’s target range of 2.50 percent to 6.50 percent. The inflation rate eased to 6.49 percent in April and was 6.50 percent in May.

A series of street protests showed little sign of abating after officials in Brazil’s two largest cities bowed to popular demand and canceled an increase in bus fares.

The central bank raised its target lending rate by 50 basis points on May 29 to 8 percent to curb inflation, surprising 38 of 57 economists surveyed by Bloomberg, who had expected a second straight increase of 25 basis points.

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