EMERGING MARKETS-Brazil real slumps 2.4 pct on Fed, domestic fears

Fri Aug 16, 2013 6:12pm EDT

By Walter Brandimarte and Tiago Pariz
    RIO DE JANEIRO, Aug 16 (Reuters) - The Brazilian real fell
to its weakest level in more than four years on Friday even as
the government tried to calm investors nervous about a faltering
domestic economy and an expected withdrawal of U.S. stimulus
measures.
    While the central bank intervened twice to provide dollar
liquidity in the futures market, Finance Minister Guido Mantega
said Brazil has several "weapons" to fight volatility in the
foreign exchange rate, including its foreign reserves.
    Efforts to support the real  failed to stop it
slumping 2.4 percent to 2.3945 per dollar, its weakest level
since early March 2009. Some analysts did not rule out a
short-term spike in the real toward 2.50 per greenback.
    "We have a scary market in the very short term," said Jaime
Ferreira, currency desk manager at Intercam, a brokerage in Sao
Paulo. "We have pressure for the roll-over of swaps and the
possibility of the Federal Reserve cutting back on stimulus."
    Brazil's central bank has been offering traditional currency
swaps, derivatives that emulate a sale of dollars in the futures
market, to smooth out a currency sell off resulting, in part,
from fears that U.S. policymakers are about to cut down on
stimulus measures that have long supported appetite for emerging
market assets.
    Growing expectations that the Fed will start rolling back
the stimulus as early as next month have weighed on most
emerging market currencies on Friday: the Mexican peso 
lost 0.7 percent to 12.91 per dollar, while the Chilean peso
ended 0.9 percent weaker at 512.60 per greenback. (See table
below)  
    The real has suffered more than its peers as investors also
fret about deteriorating prospects for the Brazilian economy.
    "In the short-term, before nervousness about Fed tapering
abates, a spike towards the neighborhood of 2.5 per dollar
cannot be ruled out," analysts at Brasil Plural brokerage wrote
in a research note.
    
    SWAPS OR SPOT DOLLAR SALES
    So far, Brazil's central bank has avoided burning its
foreign reserves to fight a dollar appreciation trend that
analysts consider global. 
    Instead, it has provided investors with hedge against a
further depreciation of the real by selling currency swaps.
    That strategy has already run its course, however, as
companies are no longer interested in buying FX protection at
current levels, said Sidnei Nehme, a director with NGO brokerage
in Sao Paulo.
    "Those who wanted hedge, have already done it. Besides that,
the spot market is lacking liquidity now. That's where the
pressure is coming from," Nehme said, joining the chorus of
analysts who say that only with dollar sales on the spot market
will the central bank be able to halt the real's depreciation.
    However, in a Thursday statement announcing plans to roll
over expiring swaps, the central bank said it would continue
with its policy of intervention in the futures market, leading
investors to believe that spot dollar sales are off the table
for now. 
    Instead, the central bank remains focused on rolling over
100,800 swaps worth about $5 billion that mature on Sept. 2.
Allowing those contracts to expire would further weigh on the
exchange rate. 
    The roll-over began on Friday with a sale of 20,000
contracts maturing on April 1, 2014. The auction was worth about
$990 million, enough to replace nearly one-fifth of the expiring
maturities. After the markets closed, the central bank announced
another roll-over auction for Monday.
    The bank also sold 21,600 contracts maturing on Nov. 1 and
April 1, 2014 during the Friday session, injecting an additional
$1.08 billion worth of swaps in the market. 
    
    Latin American FX prices at 2145 GMT:
    
 Currencies                         daily %    YTD %
                                     change   change
                            Latest           
 Brazil real                2.3945    -2.40   -14.80
                                             
 Mexico peso               12.9100    -0.66    -0.35
                                             
 Chile peso               512.6000    -0.90    -6.61
                                             
 Colombia peso           1912.0000    -0.58    -7.64
                                             
 Peru sol                   2.7960     0.00    -8.76
                                             
 Argentina peso             5.5900    -0.18   -12.12

 Argentina peso             8.9000     0.56   -23.82
FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.