Tombini Sees Waning Demand for Brazil Hedge; Real Weakens

Brazil’s central bank President Alexandre Tombini said demand at daily swap auctions has eased, signaling the bank may scale down or end the program that aimed to support the real.

The currency erased earlier gains and dropped the most among emerging markets following the comments. The daily auctions are due to expire on June 30.

“More recently we have noted a certain drop in demand” for the swap contracts, Tombini said at a conference in Bloomberg’s Sao Paulo office.

Brazil has sold swaps to support the currency and limit increases in the price of imported goods under a program initially announced in August and extended in December, helping the real advance 6.7 percent this year after dropping 13 percent in 2013. The program was implemented after the Federal Reserve bank indicated it was preparing to reduce the amount of money pumped into the world economy.

“The message is that, if the central bank decides to extend the program, it will be with a smaller volume,” Luis Otavio de Souza Leal, chief economist at Banco ABC Brasil, said in an interview from Sao Paulo.

The real’s devaluation in 2013 and rising food costs have stoked price increases, undermining the central bank’s effort to tame above-target inflation. Tombini has boosted the benchmark Selic interest rate nine consecutive times to 11 percent in the world’s longest tightening cycle.

Real Decline

The real, after gaining as much as 0.3 percent today, fell 0.54 percent to 2.2193 per U.S. dollar at 12:36 p.m. local time. Today’s decline is the most among emerging markets, according to data compiled by Bloomberg.

Tombini, 50, has raised Brazil’s key rate to the highest level in more than two years. Following weak economic data, traders have increased bets he will hold the Selic unchanged next week for the first time since March 2013 even as the pace of annual inflation quickens.

Consumer prices rose 0.58 percent in the month through mid-May, the smallest increase since November and compared with 0.78 percent a month earlier, the national statistics agency said on May 21. Still, annual inflation quickened to 6.31 percent from 6.19 percent in mid-April and has remained above the central bank’s 4.5 percent target since August 2010.

Retail sales in March unexpectedly contracted from February as sales at supermarkets declined, the national statistics agency said on May 15. The government reported in the prior week that industrial production fell in the same month on a drop in capital goods output.

Usiminas Siderurgicas de Minas Gerais SA is one of the firms affected by waning economic activity. Brazil’s confidence indicators confirm a deterioration in the country’s business environment and a less favorable growth scenario for industry, Usiminas said in an April 24 statement.

’Paying Attention’

Analysts have cut their 2014 economic growth forecast by more than half in the past year to 1.62 percent, according to a May 16 central bank survey. Those economists also expect inflation to quicken to 6.43 percent by year end, which would be the fifth straight year above the central bank’s target.

In that context, Tombini’s remarks today suggest he is comfortable with the real fluctuating between 2.20 and 2.22 per U.S. dollar, said Newton Rosa, chief economist at Sul America Investimentos.

The central bank “is paying attention to make sure it does not fall below 2.20,” Rosa said by phone today. “At the same time, it preserves ammunition for later on when the FED starts to adjust its monetary policy.”

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