UPDATE 3-Brazil currency dives, rate futures soar despite intervention

Thu Jun 20, 2013 4:18pm EDT

* Real tumbles to over 4-year low on Fed, China concerns

* Interest rate futures soar as weaker real seen fueling inflation

* Central bank intervenes with FX swaps, dollar sales on spot market

* Treasury repurchases local government debt to stabilize market

By Walter Brandimarte and Natalia Cacioli

RIO DE JANEIRO, June 20 (Reuters) - Brazil's currency fell sharply on Thursday and interest-rate futures soared for a second day, defying government efforts to stabilize both markets, as investors fret about a likely withdrawal of U.S. stimulus and an economic slowdown in China.

The real closed 1.6 percent lower at 2.2568 per dollar, its weakest level in more than four years, complicating government efforts to rein in inflation. Since the beginning of May, the real has lost more than 11 percent.

The currency rout deepened a day after Federal Reserve Chairman Ben Bernanke said the U.S. central bank will probably reduce its stimulus program this year and finish it by mid-2014. The Fed's stimulus has kept U.S. interest rates low for years, supporting investor appetite for emerging-market assets.

Chinese factory activity slowed in June to a nine-month low, adding to worries about slower demand from the main market for some of Brazil's principal exports such as iron ore and soybeans.

"Markets are going through a panic moment. The central bank, within its possibilities, is doing its job (to calm down investors) but the sentiment is pretty bad," said Glauber Romano, a trader at the Intercam brokerage in Sao Paulo.

Earlier on Thursday, Brazil's central bank sold 30,000 traditional currency swap contracts due on Sept. 2 and another 30,000 contracts maturing on Oct. 1, a strategy that emulates the sale of dollars in the futures market.

The contracts provide investors with a hedge, a kind of insurance, against further declines in the dollar. The intervention only briefly supported the real, however.

In early afternoon, the central bank returned to the market with an auction of as much as $3 billion directly on the spot market, in an attempt to provide temporary dollar liquidity to the system.

The bank said it intended to sell the greenbacks with repurchase agreement dates set for September 3 and October 1.

INTEREST-RATE FUTURES SOAR

The rout in the currency market contributed to pushing interest-rate futures sharply higher on the BM&FBovespa exchange.

Investors fear that the sharp depreciation of the real will further stoke inflation by increasing the price of imported goods, forcing the central bank to increase its benchmark Selic interest rate more aggressively.

The spike in interest-rate futures came in spite of news that Brazil's two biggest cities agreed to revoke an increase in public transportation fares following nationwide protests against poor public services.

Lower bus fares should reduce the benchmark IPCA inflation index by 0.1 percentage point, calculated Daniel Cunha, an economist with XP Investimentos in Sao Paulo.

The move seemed insufficient to ease concerns about the long-term inflation trends. Reports of heavy selling of domestic government bonds by foreigners also contributed to the increase in local interest rates, traders said.

In an attempt to stabilize the secondary market for domestic debt, the Brazilian Treasury conducted extraordinary auctions to repurchase government bonds for the second time this week, resorting to a strategy it had not used since 2008.

"After the Fed statement, we understand the market needs price parameters," said a Treasury official who asked not to be named. "That is the reason for those extraordinary auctions."

On Thursday, the Treasury bought back a little over 1 million LTN and NTN-F notes, fixed-rate debt instruments regularly sold by the government. It had initially offered to repurchase as much 4 million of such notes.

It also bought back 240 million inflation-protected NTN-B notes, out of an initial repurchase offer of up to 2 million of those instruments.

Additional repurchase auctions of LTN, NTN-F and NTN-B will be held on Friday, the Finance Ministry said in a statement.

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