Brazil Real Outperforms as Central Bank Scales Back Intervention

  • Bank reduces amount of reverse currency swaps it offers
  • Major currencies decline ahead of Yellen’s speech next week

Brazil’s real rallied the most in two weeks, defying a slump in emerging markets, as the central bank scaled back efforts to weaken the currency.

The real gained 1 percent to 3.205 per dollar Friday in Sao Paulo, leaving it down 0.4 percent this week. The U.S. dollar index was up 0.4 percent as investors grew cautious before Federal Reserve Chair Janet Yellen’s speech at a meeting next week that may give clues on whether U.S. interest rates will rise this year. An index of 20 emerging-market currencies slid 0.3 percent.

After the real posted three straight days of declines, it’s longest losing streak in six weeks, Brazil’s central bank curbed its intervention program by reducing the amount of reverse foreign-exchange swaps it offers from 15,000 to 10,000, equivalent to buying $500 million in the futures market, down from $750 million. The monetary authority increased daily auctions on Aug. 11 after the real reached a one-year high.

"The goal is to ease the currency’s volatility without setting any floor or ceiling for the foreign exchange rate," said Mauricio Oreng, a senior strategist at Rabobank in Sao Paulo. "I keep the view that the central bank is doing what it has proposed, letting the currency fluctuate and allowing the trend to be dictated by the market."

Policy makers revived the intervention program in March as the real posted the world’s biggest gains this year, dimming the outlook for exports. Since then, the central bank has sold $60.8 billion in reverse swap contracts, reducing the total outstanding volume of contracts to support the currency to the lowest since 2013. 

"As the real has weakened, they decreased the amount, but they could increase it at any time," said Andres Jaime, a foreign-exchange and rates strategist at Barclays Plc in New York. It shouldn’t be interpreted as implying that the central bank will intervene less often in the future, he said. "The next day they can go back to 15,000 contracts."

Ricardo Gomes da Silva, the foreign-exchange trading head at brokerage Correparti, has a different view. The central bank is indicating it wants to keep the currency within 3.1 to 3.2 per dollar, he wrote Friday in a report for clients.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, declined 0.05 percentage point to 12.69 percent, leaving them up 0.04 percentage point this week.

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