UPDATE 2-Brazil intervenes heavily on FX market, real gains

Mon Dec 3, 2012 4:33pm EST

* Central bank calls 2 swap auctions in the morning

* Later, bank calls 2 auctions to sell dollars on spot market

* Real closes 0.5 pct stronger at 2.119 per dollar

By Walter Brandimarte

RIO DE JANEIRO, Dec 3 (Reuters) - Brazil's central bank on Monday intervened heavily in the foreign exchange market to halt a sharp currency depreciation and boost dollar liquidity at the end of the year, when greenbacks are traditionally scarce in the country.

The series of interventions, which included two currency swap auctions in the morning and two dollar auctions on the spot market in the afternoon, caused the real to close only 0.5 percent stronger at 2.1190 per U.S. dollar.

Despite the magnitude of the actions, investors believe the central bank is only trying to smooth out an expected weakening of the real, which lost 4.7 percent in November, half of that in the last week of the month.

Bets on a weaker real greatly increased on Friday after data showed the Brazilian economy grew in the third quarter at half the rate expected by economists, but investors still wonder how much the central bank will allow the real to slide.

"We still don't know how much weaker the government wants the currency to be," said Joao Medeiros, a currency director at Pioneer brokerage.

The real dropped to 2.1382 per dollar right after the market opened, its weakest level in more than 3-1/2 years, before the central bank called two consecutive auctions to sell traditional currency swaps - derivative contracts that support the real by emulating the sale of dollars in the futures market.

The real erased its losses and jumped as much as 1.6 percent after that initial move, which suggested the central bank was not comfortable with the currency's fast depreciation pace. But gains slowly faded in the afternoon as investors followed bank recommendations to reduce exposure to the real.

The central bank then announced two separate auctions to sell as much as $5 billion on the spot market with the agreement to repurchase the amounts sold in 30 and 61 days, respectively.

"Investors are becoming long dollars, I believe that is because they need to hedge their positions. Even after two swap auctions, the market wanted more," said Reginaldo Galhardo, head of currency trading at Treviso brokerage in Sao Paulo.

It was the first time the central bank sold dollars with repurchase agreements since April 2009 - a strategy it normally uses to provide temporary liquidity to the foreign exchange market.

The central bank did not say how much it sold in the afternoon auctions, but it signaled there was demand for both. In a statement, the bank said it was setting cutoff prices of 2.12245 reais and 2.1324 reais for each of the auctions, with repurchase dates on January 4 and February 4, respectively.

Less than two weeks ago, central bank president Alexandre Tombini warned the bank was ready to protect the currency from speculative bouts and provide temporary liquidity to the exchange market at year-end.

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