Brazilian dollar-based loan rates are climbing to a six-month high relative to those overseas as central bank President Henrique Meirelles boosts purchases of the greenback to slow the real’s world-beating rally.
Contracts due in January known as cupom cambial, a measure of annual dollar borrowing costs in Brazil, rose to 1.89 percent on Sept. 13, the highest level since July 23. The rate has jumped 11 basis points, or 0.11 percentage point, since Sept. 8, when the central bank started holding two daily auctions to buy dollars, helping create a shortage of the U.S. currency in the Brazilian loan market.
The yield swelled this week to as wide as 160 basis points above the three-month dollar Libor rate, a gauge of interbank borrowing costs in international markets, marking the biggest differential since March. The gap is prompting investors to pour money into Brazil, spurring gains in the real that the central bank is seeking to avoid, according to Sao Paulo-based hedge fund M. Safra & Co. and London-based 4Cast Inc.
“The central bank is taking out all the dollars, generating pressure on cupom cambial,” said Guilherme Figueiredo, who oversees $1.3 billion as director at M. Safra. “What they are doing is producing a distortion in the local dollar curve.”
Record Deficit
The real has surged 5.3 percent against the dollar in the past four months, extending its rally since the end of 2008 to 35 percent, the most among all currencies tracked by Bloomberg. Meirelles, who is looking to stem the gains and shore up exports as Brazil’s current account deficit swells to a record, will likely shift tactics and begin buying dollars in the futures market to push cupom cambial rates back down, Figueiredo said.
Brazil sold $50 million of bonds due in 2041 in Asia today after selling $500 million of the securities in Europe and the U.S. yesterday to yield 5.2 percent, or 142 basis points more than U.S. Treasuries. The government first sold the 2041 bonds in September 2009, issuing $1.28 billion at a yield of 5.8 percent.
Central bank officials called currency traders on July 23 to gauge demand for so-called reverse currency swaps, which allow policy makers to buy dollars in the futures market, according to BNP Paribas and Nomura Securities International Inc. Under the contracts, the central bank pays investors the Brazilian overnight interbank rate, now at 10.75 percent, in reais and receives the cupom cambial rate in dollars.
Policy makers last sold the contracts on May 5, 2009, helping spark a 1 percent slide in the real that day.
“The central bank doesn’t comment on possible future actions,” the bank said in an e-mailed response to questions.
Bond Sale
Brazil’s real touched a nine-month high of 1.7031 per dollar yesterday as traders prepared for a surge in dollar supply from foreigners participating in a $32 billion share offering by state-run Petroleo Brasileiro SA. The rally helped swell Brazil’s annual current account deficit, the broadest measure of trade in goods and services, to $43.8 billion in July from $18 billion in the year-earlier period. The real traded at 1.7104 per dollar today.
In the futures market, international investors boosted their bullish bets on the currency to a two-year high on Aug. 31, making 151,847 more wagers on the real gaining than falling, data from the BM&FBovespa SA exchange in Sao Paulo show. The wagers declined to 135,748 yesterday.
“The pressure is in the futures market,” said Pedro Tuesta, a senior economist for Latin America at 4Cast in Washington. “The central bank has to act in the futures market.”
‘First Line’
The extra yield investors demand to own Brazilian dollar- bonds instead of Treasuries fell six basis points today to 209, according to JPMorgan Chase & Co. indexes.
The cost of protecting Brazilian bonds against default for five years held at 120 basis points yesterday, according to CMA DataVision prices. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Yields on the interbank rate futures contract due in January held at 10.66 percent today, indicating traders expect the central bank will keep its benchmark rate at 10.75 percent through year-end. The benchmark rate in the U.S., U.K., Japan and the euro-zone is no more than 1 percent.
Central bankers have held two auctions to buy dollars in the foreign-exchange market each day since Sept. 8 after buying $18.6 billion in the first eight months of the year, up from the $7.3 billion they purchased in the year-earlier period, according to the bank’s website.
Finance Minister Guido Mantega told investors in a Sept. 9 speech in Recife that he wouldn’t “allow” the real to keep gaining. The government imposed a 2 percent tax on foreigners’ investment in stocks and bonds in October, helping prevent the real from strengthening beyond 1.7 per dollar this year.
“The spot market intervention is their first line of defense,” said Figueiredo at M. Safra. “We are getting closer and closer to the point that they will step in the futures market.”
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net;
Contracts due in January known as cupom cambial, a measure of annual dollar borrowing costs in Brazil, rose to 1.89 percent on Sept. 13, the highest level since July 23. The rate has jumped 11 basis points, or 0.11 percentage point, since Sept. 8, when the central bank started holding two daily auctions to buy dollars, helping create a shortage of the U.S. currency in the Brazilian loan market.
The yield swelled this week to as wide as 160 basis points above the three-month dollar Libor rate, a gauge of interbank borrowing costs in international markets, marking the biggest differential since March. The gap is prompting investors to pour money into Brazil, spurring gains in the real that the central bank is seeking to avoid, according to Sao Paulo-based hedge fund M. Safra & Co. and London-based 4Cast Inc.
“The central bank is taking out all the dollars, generating pressure on cupom cambial,” said Guilherme Figueiredo, who oversees $1.3 billion as director at M. Safra. “What they are doing is producing a distortion in the local dollar curve.”
Record Deficit
The real has surged 5.3 percent against the dollar in the past four months, extending its rally since the end of 2008 to 35 percent, the most among all currencies tracked by Bloomberg. Meirelles, who is looking to stem the gains and shore up exports as Brazil’s current account deficit swells to a record, will likely shift tactics and begin buying dollars in the futures market to push cupom cambial rates back down, Figueiredo said.
Brazil sold $50 million of bonds due in 2041 in Asia today after selling $500 million of the securities in Europe and the U.S. yesterday to yield 5.2 percent, or 142 basis points more than U.S. Treasuries. The government first sold the 2041 bonds in September 2009, issuing $1.28 billion at a yield of 5.8 percent.
Central bank officials called currency traders on July 23 to gauge demand for so-called reverse currency swaps, which allow policy makers to buy dollars in the futures market, according to BNP Paribas and Nomura Securities International Inc. Under the contracts, the central bank pays investors the Brazilian overnight interbank rate, now at 10.75 percent, in reais and receives the cupom cambial rate in dollars.
Policy makers last sold the contracts on May 5, 2009, helping spark a 1 percent slide in the real that day.
“The central bank doesn’t comment on possible future actions,” the bank said in an e-mailed response to questions.
Bond Sale
Brazil’s real touched a nine-month high of 1.7031 per dollar yesterday as traders prepared for a surge in dollar supply from foreigners participating in a $32 billion share offering by state-run Petroleo Brasileiro SA. The rally helped swell Brazil’s annual current account deficit, the broadest measure of trade in goods and services, to $43.8 billion in July from $18 billion in the year-earlier period. The real traded at 1.7104 per dollar today.
In the futures market, international investors boosted their bullish bets on the currency to a two-year high on Aug. 31, making 151,847 more wagers on the real gaining than falling, data from the BM&FBovespa SA exchange in Sao Paulo show. The wagers declined to 135,748 yesterday.
“The pressure is in the futures market,” said Pedro Tuesta, a senior economist for Latin America at 4Cast in Washington. “The central bank has to act in the futures market.”
‘First Line’
The extra yield investors demand to own Brazilian dollar- bonds instead of Treasuries fell six basis points today to 209, according to JPMorgan Chase & Co. indexes.
The cost of protecting Brazilian bonds against default for five years held at 120 basis points yesterday, according to CMA DataVision prices. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Yields on the interbank rate futures contract due in January held at 10.66 percent today, indicating traders expect the central bank will keep its benchmark rate at 10.75 percent through year-end. The benchmark rate in the U.S., U.K., Japan and the euro-zone is no more than 1 percent.
Central bankers have held two auctions to buy dollars in the foreign-exchange market each day since Sept. 8 after buying $18.6 billion in the first eight months of the year, up from the $7.3 billion they purchased in the year-earlier period, according to the bank’s website.
Finance Minister Guido Mantega told investors in a Sept. 9 speech in Recife that he wouldn’t “allow” the real to keep gaining. The government imposed a 2 percent tax on foreigners’ investment in stocks and bonds in October, helping prevent the real from strengthening beyond 1.7 per dollar this year.
“The spot market intervention is their first line of defense,” said Figueiredo at M. Safra. “We are getting closer and closer to the point that they will step in the futures market.”
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net;
