Brazil Real Rises With Emerging Markets Following Swap Auction

  • Real most volatile major currency on political uncertainty
  • Central bank sold only one sixth of reverse-swap contracts

Brazil’s real advanced after the central bank saw little demand for for auction of contracts that would protect against a falling currency, indicating traders are betting that this year’s rally has further to go.

The real rose 1 percent to 3.6034 per dollar in Sao Paulo, extending this year’s biggest-in-the-world gain. The central bank on Wednesday sold just 3,000 of the 20,000 foreign-exchange reverse-swap contracts it offered. Auctioning the securities, a move equivalent to buying dollars in the futures market, tends to weaken the real.

"The Brazilian central bank is testing the market and traders will test the central bank until they know what it actually intends to do," said Ipek Ozkardeskaya, an analyst at London Capital Group. Before this month, the central bank hadn’t sold the reverse-swap contracts since March 2013.

The real has strengthened 9.9 percent this year, the most among about 150 currencies tracked by Bloomberg, bolstered by speculation that President Dilma Rousseff will lose her battle to avoid impeachment and a new government will be able to bolster growth. Emerging-market currencies gained Wednesday after Federal Reserve Chair Janet Yellen reasserted the central bank’s gradual approach to raising interest rates.

Bearish bets by foreign investors against the real are at the lowest level since November 2013, according to data from BM&FBovespa, South America’s largest exchange. The bearish wagers were at $16.5 billion as of March 29, down 57.4 percent from a record high of $38.7 billion on May 29.  

One-month implied volatility, a gauge of traders’ expectations for swings in the currency, rose 0.45 percentage point to 22 percent. Brazil registered a foreign exchange outflow of $2.57 billion this month as of March 24, according to data from the central bank released Wednesday. The outflow so far this year has been $10.4 billion, the data show, compared with an inflow of $3.3 billion in the same period last year.

Rousseff’s personal approval rating held at 14 percent, according to an Ibope poll released on Wednesday by the National Industry Confederation, or CNI. The percentage of those who consider her government good or very good was 10 percent, compared with 9 percent in a previous poll in December.

Rousseff has had a tumultuous month that included a wave of protests, accusations that she tried to obstruct a corruption probe, and a legal setback to her efforts to bring her predecessor and mentor into the government. Some traders say that Rousseff’s removal from office would clear the way for a new government that could bolster growth and implement fiscal reforms. The real has advanced 11 percent in March.

Swap rates on the contract maturing in January 2017, a gauge of expectations for Brazil’s interest rates, rose 0.035 percentage point to 13.76 percent.

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