Brazil Real Posts Best Month in 13 Years as Traders Snub Swaps

  • Central bank places one-sixth of reverse swaps in auction
  • Currency also rises as Brazil signals no room to cut rates

Brazil’s real posted its biggest monthly rally since 2003 after the central bank sold just a fraction of the contracts it offered to protect against a decline in the currency, indicating traders are still betting on appreciation.

The real rose for a second day after the central bank sold 2,900 out of 17,000 foreign-exchange reverse-swap contracts offered Thursday. Auctioning the securities is equivalent to buying dollars in the futures market. The real also climbed after policy makers said they see no room for cutting borrowing costs. Along with the Brazilian currency, most of its major counterparts climbed against the dollar amid speculation that the Federal Reserve will be cautious when raising interest rates.

“Smaller than expected swap placing, the dollar drop worldwide and a more conservative central bank are justifying the move in the currency," said Daniel Weeks, an economist at Garde Asset Management in Sao Paulo.

The Brazilian real has gained the most among almost 150 currencies worldwide this year, bolstered by speculation that President Dilma Rousseff will lose her battle to avoid impeachment and a new government will be able to revive economic growth. Brazil’s inflation-adjusted exchange rate against its major trading partners is 22 percent below the 10-year average, according to data compiled by the Bank for International Settlements.

The real advanced 0.3 percent to 3.5922 per dollar on Thursday, extending its monthly gain to 12 percent. It still pared an earlier rally of as much as 2 percent. One-month implied volatility, a gauge of traders’ expectations for swings in the currency, was the highest among 16 major currencies tracked by Bloomberg. Swap rates on contracts due January 2017 advanced 0.125 percentage point to 13.885 percent.

Consumer prices will rise 4.9 percent in 2017, above the 4.5 percent government target, the central bank said in its quarterly inflation report. Policy makers also reiterated they will “adopt the necessary measures” to ensure the official target is met next year.

“The inflation report came in slightly more hawkish than the market anticipated,” said Eduardo Longo, who helps manage 23 billion reais as a fixed-income portfolio manager at Quantitas, in Porto Alegre, Brazil.

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