Brazilian Real Foreign Exchange

 

Brazilian real exchange rate weakens as Central Bank intervens in currency market

Published on March 1, 2012 by   ·   No Comments

The Brazilian real’s foreign exchange rate weakened on Wednesday as Brazil’s Central Bank intervened in the currency market twice, reinforcing the government’s desire to protect exporters and manufacturers by stopping the real’s 10 percent gain against the US dollar so far in 2012.

“The market is testing the central bank practically every day,” said Clodoir Vieira, an economist at Sao Paulo brokerage house Souza Barros. “But the central bank is giving a clear signal that the floor for the real is about BRL1.70 to BRL1.71 to the US dollar.”

The Brazilian real exited active trading at BRL1.7141 to the dollar, according to Tullett Prebon via FactSet. That was weaker from Tuesday’s close at BRL1.6992 to the greenback, and well off the opening quote of BRL1.6902 that triggered action from the Brazilian Central Bank.

An improving outlook for global economic growth and continued ample liquidity in financial markets have once again opened the door for a flood of investment inflows into Latin America’s largest economy. Brazil’s towering interest rates also continue to make the country a popular destination for investors seeking higher rates of return, traders said.

The latest fuel came after the European Central Bank granted EUR530 billion in inexpensive three-year loans to 800 banks as the single-currency bloc continues to struggle with its ongoing debt crisis. The latest wave of loans followed December’s EUR489 billion in lending. The ECB aims to avoid an escalating crisis as banks struggle to pay off maturing debts and also to mitigate a sharp pullback in bank lending to customers across ailing European economies.

The real has also strengthened as local companies tap overseas debt markets with a series of bond issues.

Brazil’s government is “always evaluating” measures to curb the real’s appreciation against the US dollar and there will be a greater chance of action following any sharp gain by the currency, a person familiar with the government’s strategy said Wednesday.

The Brazilian Central Bank continued its recent string of aggressive actions to contain the real’s nearly 10% gain against the US dollar. The bank intervened twice early in the session after the real opened at BRL1.6902 to the dollar, below the psychologically important BRL1.70 mark that many traders consider the government’s “line in the sand.”

In the first move, the bank sold $1.52 billion worth of so-called reverse swap contracts at two maturities. The actions, which allow investors to swap foreign exchange positions for government paper linked to interest rates, typically support the dollar by removing Brazilian real exposure from the market. The auctions were used extensively in late 2005 and early 2006 before market interest in the swaps waned. The reverse swaps have been used infrequently since then.

The central bank also purchased an undisclosed volume of dollars from the spot market at a snap auction Wednesday, paying BRL1.7032 to the dollar. The real weakened sharply after the two moves, climbing back above the key BRL1.70 mark to trade midafternoon at BRL1.7166 to the dollar, according to Tullett Prebon via FactSet.

“Today’s interventions were more aggressive than we would normally expect by the Brazilian Central Bank,” said Tony Volpon, head of emerging market research at Nomura Securities International in New York.

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