EMERGING MARKETS-Brazil's real sinks near central-bank trigger

Wed Nov 21, 2012 12:48pm EST

Related Topics

* Investors think Brazil will let real drop past 2.1/dlr
    * Brazil's rates rise as weaker real feeds inflation fears
    * Brazil's real drops 0.7 pct, Mexico's peso off 0.3 pct

    By Walter Brandimarte and Natalia Cacioli
    RIO DE JANEIRO, Nov 21 (Reuters) - The Brazilian real led
losses among Latin American currencies on Wednesday, nearing a
level that has triggered central bank interventions in the past,
as investors speculated that the government would favor a weaker
currency to boost the economy.
    The Mexican peso also suffered losses, although a
more modest 0.3 percent, after failure by international lenders
to agree on emergency aid for Greece drove investors to
safe-haven assets such as the dollar.
    The Brazilian real  lost 0.7 percent to 2.0955
per dollar, just a tad from the ceiling of an informal trading
range of 2.0-2.1 per dollar, where it has been stuck since early
July.
    In the past several months, the central bank has intervened
in the market every time the real nears the edge of that range,
keeping the currency at a level considered beneficial to
exporters and at the same time, not too bad for inflation.
    But concerns that the Brazilian economy is taking too long
to recover have increased speculation that this time, the
government would let the real weaken past the 2.1 per dollar
mark. Such adjustment would be minor, however, to minimize
inflation pressures. 
    "Given a history of raising the ranges for the dollar-real
exchange rate over time, we imagine that the central bank is not
going to defend the 2.10 level," Citigroup's strategists Dirk
Willer and Kenneth Lam wrote in a research note.
    "Raising the upper end of the ceiling to 2.12 or potentially
to 2.15 does seem plausible," they added.
    Expectations that the government is about to let the
currency weaken further grew after President Dilma Rousseff told
local daily Valor Economico, in an interview published on
Tuesday, that "we're looking for an exchange rate that is not
this one, with a devalued dollar and an overvalued real."
    Joao Medeiros, a currency director with Pioneer brokerage in
Sao Paulo, said, "I don't see the fundamentals of this currency
move, but according to what Dilma said, the government wants a
weaker real."
    In a note to clients, Nomura strategists said they expect
the real to weaken to 2.14 per dollar in the near future.
    
    INFLATION CONCERNS
    But other analysts expressed concern that a weaker currency
could further boost the price of imported grains and other
commodities, boosting an inflation rate that is already running
above the government target of 4.5 percent, with a tolerance
band of 2 percentage points up or down.
    "With economic activity gaining momentum, another round of
real depreciation could have a larger effect on inflation, which
is an event we do not believe the central bank is looking for,"
Barclays' analysts Guilherme Loureiro and Marcelo Salomon wrote
in a research note.
    Inflation concerns also drove Brazil's domestic yield curve
higher. Interest-rate contracts maturing in January 2014
 rose 1 basis point to 7.34 percent.

    Latin American currencies at 1720 GMT
    
 Currencies                         daily %    YTD %
                                     change   change
                            Latest           
 Brazil real                2.0955    -0.72   -10.83
                                             
 Mexico peso               13.0465    -0.31     7.07
                                             
 Argentina peso*            6.3500     0.16   -25.51
                                             
 Chile peso               477.8000     0.02     8.69
                                             
 Colombia peso          1,816.4000    -0.02     6.72
                                             
 Peru sol                   2.5970     0.08     3.85
                                             
 * Argentine peso's rate between                    
 brokerages
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