The real fell 0.5 percent to 1.6925 per U.S. dollar at 10.59 a.m. in Sao Paulo. Photographer: Adriano Machado/Bloomberg
Brazil allowed its sovereign wealth fund to trade currency derivatives, signaling President Dilma Rousseff’s administration is ready to take additional measures to curb the rally in the real.
The Treasury, which manages the wealth fund, may sign an agreement with the central bank to carry out currency transactions in the spot and futures markets, according to a Sept. 17 decision published today in the Official Gazette.
The real fell 0.5 percent to 1.6925 per U.S. dollar at 10:59 a.m. in Sao Paulo (7:59 a.m. New York) as traders anticipate the government may step up intervention in the currency markets to prevent the real from appreciating, said Diego Donadio, strategist for Latin America at BNP Paribas.
“The government is clearly not comfortable with the level where the real is trading,” Donadio said in a telephone interview from Sao Paulo. “It is preparing the legal framework to intervene. The decision to act will hinge on the real’s exchange rate.”
Today’s announcement came after the central bank on Jan. 6 set reserve requirements on short dollar positions held by local banks in its third attempt since October to stem a currency rally that is making Brazilian exports more expensive.
Policy makers in Latin America are trying to stem currency gains as fast economic growth and low interest rates in rich nations attract capital inflows to the region. Finance Minister Guido Mantega said last week that Brazil’s government is ready to take new measures to prevent the dollar from “melting” and stem the real’s 37 percent rally against the dollar since 2009.
Futures Pressure
Mantega told the Financial Times in an interview published yesterday that pressure on the real is coming from the futures market and reiterated the government may take additional measures to prevent the currency from gaining.
The central bank declined to comment on possible agreements with the Treasury to carry out deals in the derivatives market, said a press officer who can’t be indentified because of internal policy. The Finance Ministry didn’t immediately respond to a request for comment from Bloomberg.
Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.
The real may weaken to 1.72 per U.S. dollar this week on fears the government will take additional measures, Donadio said. It could slip to 1.75 per U.S. dollar should policy makers step into the futures market, he said.
The central bank last sold reverse currency swaps, a contract equivalent to buying dollars in the futures market, in May 5, 2009, helping spark a 1 percent slide in the real that day. Under these contracts, the central bank pays investors the Brazilian overnight interbank rate, now at 10.75 percent, in reais and receives a fixed interest rate in dollars.
To contact the reporter on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net
To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net
By - Jan 10, 2011 9:59 AM ET
Brazil Allows Sovereign Fund to Trade Currency Derivatives; Real Weakens
