EMERGING MARKETS-Brazil real rallies on move by central bank

Mon Jan 28, 2013 11:20am EST

* Central bank sells 37,000 traditional currency swaps
    * Brazil action seen as a sign of inflation concerns
    * Mexican peso weakens on fear of lower interest rates

    By Walter Brandimarte
    RIO DE JANEIRO, Jan 28 (Reuters) - The Brazilian real
rallied over 1 percent on Monday, bucking losses in other Latin
American foreign exchange markets, after the central bank
signaled it would favor a stronger currency to fight inflation.
    Speculation that the government now wants a real around 2
per dollar, the latest in a series of changes of heart by
Brazilian policymakers, grew after the central bank announced
early on Monday that it was rolling over all of the 37,000
traditional currency swaps that expire on Feb. 1.
 
    Those contracts, which mimic the sale of dollars in the
futures market, were originally sold by the bank to boost
liquidity in the foreign exchange market at the end of the year,
a period when greenbacks traditionally are scarcer. 
    The swap rollover "is a good indication that the central
bank is really becoming more tolerant to a stronger real, at
least in the short term." said Flavia Cattan-Naslausky, a
strategist with RBS Securities in Stamford, Connecticut. "I
believe that is related to a deterioration in inflation." 
    The real last traded  at 2.0550 per dollar, 1.25
percent stronger from Friday's close. Investors could soon try
to take the currency past 2 per dollar -- a mark it has not
crossed since early July, when the government intervened to
weaken the currency in order to boost exports.
    The swap rollover, announced when the real was already
strengthening, is a sign that the central bank this time would
allow the real to pierce the 2-per-dollar level as long as there
are no sharp currency moves, said Cattan-Naslausky.
    Investors are betting the central bank will favor a stronger
real at least in the first quarter of the year, when inflation
pressures are traditionally higher in Brazil.
    Brazil's benchmark consumer inflation rate closed 2012 at
5.84 percent, well above the center of a government target of
4.5 percent, but still within a tolerance range of 2 percentage
points. Prices continued to climb in the beginning of 2013 as
items such as food and personal expenses rose.
    Other key Latin American currencies traded weaker to flat on
Monday. The Mexican peso sold off for a second
consecutive session as investors, fearing a possible interest
rate cut by the country's central bank, reduced bets on a
stronger currency on the Chicago exchange.
    The Chilean peso weakened 0.3 percent to 473.10 per
dollar, pressured by fears that policymakers may intervene in
the market to curb the currency's recent strength.   

    Latin American FX prices at 1605 GMT:
    
 Currencies                         daily %    YTD %
                                     change   change
                            Latest           
 Brazil real                2.0055     1.25     1.72
                                             
 Mexico peso               12.7790    -0.56     0.67
                                             
 Chile peso               473.1000    -0.27     1.18
                                             
 Colombia peso           1780.7300    -0.07    -0.83
                                             
 Peru sol                   2.5600    -0.08    -0.35
                                             
 Argentina peso             4.9700    -0.05    -1.16

 Argentina peso             7.5800     0.53   -10.55
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