Brazil Real Surges on $60 Billion Intervention Plan

Brazil’s real posted its biggest gain in almost two years as the central bank stepped up efforts to stem the world’s worst currency decline, announcing a $60 billion intervention program involving swaps and loans.

The real climbed 3.7 percent to 2.3488 per dollar in Sao Paulo, paring its decline in the past three months to 13 percent, still the biggest among 31 major dollar counterparts tracked by Bloomberg. It’s up 1.9 percent this week, the most since February.

“This currency program helps to reduce the market’s apprehension over the exchange rate a bit,” Luciano Rostagno, the chief strategist at Banco Mizuho do Brasil in Sao Paulo, said in a phone interview. “The measures won’t be enough to decouple the real from foreign markets, however.”

A plunge in the real to a four-year low this week threatened to stoke inflation, which is at almost the top end of the central bank’s target range. Investors are exiting emerging markets as the Federal Reserve prepares to reduce the amount of money it pumps into the world economy.

The central bank will auction $1 billion of dollar loans every Friday starting today and offer the equivalent of $500 million worth of foreign-exchange swaps each day Monday through Thursday, according to a statement late yesterday. The program will run through Dec. 31.

Indonesia, Peru

Indonesian policy makers said today that they will increase foreign-currency supply to stem a sliding rupiah, while allowing more mineral exports this year to narrow a current-account deficit and spur economic growth. Peru’s central bank sold a record $600 million in the local foreign-exchange market on Aug. 21 to support the sol after it touched a three-year low.

In its defense of the real, Brazil’s central bank has yet to tap into its $374 billion in foreign reserves, which are up from $261 billion three years ago and $48 billion a decade ago.

The intervention announced yesterday adds to swap and credit-line actions already announced this year worth $45 billion. The central bank had been conducting the offerings without an established schedule.

The program is “one of the boldest attempts yet by an emerging-market central bank to shore up its currency following the rout of recent weeks,” Neil Shearing, the chief emerging-markets economist at Capital Economics in London, said in an e-mailed report.

Emergency Meeting

The announcement follows an emergency meeting President Dilma Rousseff called on the evening of Aug. 21 at her residence, Palacio Alvorada, to discuss the weakening currency with central bank president Alexandre Tombini and Finance Minister Guido Mantega. Tombini canceled a trip to the meetings in Jackson Hole, Wyoming, of the world’s top monetary policy makers so he could monitor Brazilian markets.

Swap rates on contracts due in January 2015 fell 35 basis points, or 0.35 percentage point, to 10.24 percent and were down nine basis points this week.

Brazil must address fundamental economic issues for investors to regain confidence, Carlos Kawall, the chief economist at Banco J. Safra SA, said by phone from London.

The fiscal situation has deteriorated as policy makers increase expenditures while implementing tax cuts worth 35.1 billion reais during the first six months of the year, according to the national tax agency.

“Aside from what the central bank is doing, the government needs to make more difficult decisions to make its fiscal policy more credible,” Kawall said.

Treasury Stance

Following the central bank’s announcement of the program yesterday, Treasury Undersecretary Paulo Valle told reporters in Brasilia that the Treasury stands ready to act when necessary. The best strategy in moments of volatility is to reduce the debt duration by buying back long-term bonds and selling short term, Valle said.

The real has tumbled this year as investors questioned Rousseff’s ability to attract investment and cut government spending, which has kept inflation above the midpoint of policy makers’ target for 35 months.

Brazil has raised its target lending rate in 2013 more than any major economy, increasing by 1.25 percentage points from a record low 7.25 percent in April.

Consumer prices as measured by the IPCA-15 index climbed 0.16 percent in the month through mid-August, the national statistics agency reported two days ago. That was more than double the 0.07 percent inflation rate in the month through mid-July. Annual inflation eased to 6.15 percent after surpassing the 6.5 percent upper limit of the central bank’s target range earlier this year.

Before it's here, it's on the Bloomberg Terminal.