Brazil Real Declines as Deficit Offsets Bid to Bolster Currency

Brazil’s real fell from a two-week high as concern the government’s budget deficit will lead to a reduction in the nation’s credit rating offset efforts to support the currency.

The real dropped 0.3 percent to 2.2709 per dollar at the close in Sao Paulo as traders awaited a signal from the U.S. Federal Reserve on when policy makers will curtail stimulus. Swap rates on the contract maturing in January 2015 climbed three basis points, or 0.03 percentage point, to 10.77 percent.

“The currency has returned to its trend of watching for Fed tapering and a very strong expectation that Brazil’s credit rating will be cut,” Hideaki Iha, a trader at Fair Corretora in Sao Paulo, said in a telephone interview.

The central bank extended the maturity on $989 million of currency swaps in the fifth straight session of rollover auctions. It sold $496 million of swaps earlier today as part of a $60 billion intervention to bolster the real and curb import price increases. The currency has pared its gain since the program was announced Aug. 22 to 7.2 percent on fiscal concern.

The central bank reported Oct. 31 that the deficit as a percentage of gross domestic product swelled to 3.3 percent in September, the largest since 2009. Standard & Poor’s and Moody’s Investors Service lowered their outlooks this year on Brazil’s rating, which both put at two levels above junk.

Fed Outlook

Brazilian bond yields climbed on speculation Fed minutes due tomorrow will indicate policy makers are closer to curtailing a stimulus program that has capped U.S. rates and spurred demand for emerging-market assets.

Yields on local-currency bonds maturing in 2023 rose 20 basis points to 12.26 percent in the biggest increase in two weeks after falling yesterday to a two-week low.

The national statistics agency reported today that consumer prices increased 5.78 percent in the 12 months through mid-November, less than all of the forecasts of 24 economists surveyed by Bloomberg. Brazil has raised the target lending rate to 9.50 percent from a record low 7.25 percent this year, the most among 49 nations tracked by Bloomberg.

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