Brazilian Real Rises for Fourth Day as Capital Controls Removed

The real climbed for a fourth day, the longest winning streak since January, as the central bank said it will eliminate reserve requirements on short dollar positions held by local banks to support the local currency.

The real appreciated 1.2 percent to 2.1867 per U.S. dollar in Sao Paulo, the best performance among 16 major dollar counterparts tracked by Bloomberg. The currency pared its rout in the past month to 6.2 percent. Swap rates on contracts maturing in January dropped one basis point, or 0.01 percentage point, to 8.93 percent today, paring their quarterly increase to 116 basis points.

The currency extended its gain after a U.S. report showed the economy expanded less than previously calculated in the first quarter, encouraging speculation the Federal Reserve will sustain a stimulus program that has buoyed demand for emerging-market assets. Brazil’s removal of the reserve requirements announced yesterday comes after it removed taxes on currency derivatives and foreigners’ purchases of bonds.

“This measure signals that the market will be more balanced,” Daniel Cunha, the chief economist at XP Investimentos, said in a phone interview from Rio de Janeiro. “The environment improved compared with last week, but there’s still a high level of uncertainty.”

The Treasury said it will hold an unscheduled auction of floating-rate government bonds maturing in 2018 tomorrow and canceled a planned auction of zero-coupon bonds, according to an e-mailed statement.

Budget Target

Finance Minister Guido Mantega said today at a legislative hearing that the government will meet its goal of a primary budget surplus, which excludes interest payments, of 2.3 percent of gross domestic product. The government reported yesterday that it posted a primary budget surplus of 6 billion reais in May, higher than the 3.8 billion reais median forecast of economists surveyed by Bloomberg.

Police fired tear gas today at crowds demonstrating near the stadium where Brazil’s national soccer team faced Uruguay in the Confederations Cup, the second clash in five days in Belo Horizonte, the country’s third-largest urban area.

President Dilma Rousseff called on June 24 for a plebiscite on political reform and pledged another 50 billion reais for urban transportation after meeting with leaders of the protest group Passe Livre.

Swap rates fluctuated today as a rebounding real eased speculation that the central bank will sustain the pace of increases in borrowing costs to curb inflation. The currency tumbled to a four-year low of 2.2575 on June 20, boosting import prices.

Monetary Policy

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

Annual inflation accelerated to 6.67 percent in the month through mid-June, the national statistics agency reported June 21. That is higher than the 6.50 percent upper level of the central bank’s target range.

While unwinding capital controls may boost the real in the short term, the move doesn’t address “core headwinds” of high household leverage, a deteriorating fiscal position, an uncompetitive manufacturing cost structure and greater participation by the government in the economy, Eduardo Suarez, a Latin America currency strategist at Bank of Nova Scotia, said in an e-mailed research report.

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