Brazil to Sell $50 Billion of Currency Swaps to Quell Real Rout
By Andre Soliani and Jamie McGee
Oct. 23 (Bloomberg) -- Brazil's central bank pledged to sell $50 billion of currency swaps, its boldest move yet to stem a two-month, 28 percent tumble in the real that has saddled companies with losses and sparked concern inflation will surge.
The real soared after the announcement, climbing 3.9 percent and erasing an initial slump of as much as 5.8 percent. The currency's losses had quickened this week -- it sank 11 percent the past two days -- amid concern that the global financial crisis will drive neighboring Argentina to default for the second time this decade.
Brazil's $50 billion swap sale plan dwarfs the size of its previous interventions in the currency market, a sign policy makers are worried the real's tumble will bankrupt companies in Latin America's biggest economy. Those concerns stem in part from the collapse in Mexico of retailer Controladora Comercial Mexicana SAB this month following a rout in the peso.
Brazil has ``been aggressive, ahead of the curve compared to other central banks,'' said Gerardo Margolis, a vice president for emerging markets at TD Securities Inc. in Toronto. He said the $50 billion swap sale plan will help shore up the real for at least a few days. ``It's a huge number.''
Policy makers pumped the equivalent of $22.9 billion into the foreign exchange market from Oct. 8 to Oct. 20 in the form of swap sales, dollar loans and outright dollar sales, central bank President Henrique Meirelles told a congressional committee in Brasilia on Oct. 21.
`Forceful Approach'
The central bank followed up today's announcement by selling $2.3 billion worth of swap contracts and buying an unspecified amount of reais. The bank said in a statement it will hold further swap auctions to meet ``liquidity needs'' in the market. The swap contracts support the real by providing investors a hedge against its decline.
``The central bank is taking a forceful approach,'' said Vladimir Caramaschi, chief strategist at Credit Agricole do Brasil. The swap offer ``is another exit for those who need to cancel hedging positions.''
The real rose as much as 6.2 percent to 2.24 per dollar today. It traded at 2.2887 at 12:09 p.m. New York time, from 2.379 yesterday. The real plunged early in the day, falling to as low as 2.526 per dollar after Standard & Poor's said it may cut Russia's debt rating.
``You have Argentina, the Russia downgrade,'' said Flavia Cattan-Naslausky, an interest-rate and currency strategist at Royal Bank of Scotland in Greenwich, Connecticut. ``Everyone is questioning who is next.''
Commodities Slump
The real has sunk 32 percent from a nine-year high of 1.5545 reached on Aug. 1 as the global crisis has driven down prices on the country's commodity exports and eroded demand for higher-yielding, emerging-market assets. Only the South African rand, down 35 percent, has fallen more over that time.
Brazil had foreign currency outflows of $3.39 billion between Oct. 1 and Oct. 21, central bank economist Altamir Lopes told reporters today in Brasilia. In September, before the global crisis deepened, the country received $2.8 billion in inflows from trade and investments.
President Luiz Inacio Lula da Silva, seeking to reverse those outflows, eliminated today a financial tax on foreign investors' purchases of fixed-income securities and loans. Lula scrapped the tax, known as IOF, of 1.5 percent on foreign investors' purchases of some financial products and of 0.38 percent on foreign-currency loans, according to the Finance Ministry.
``This makes a lot of sense,'' Cattan-Naslausky said. ``No one likes capital controls.''
To contact the reporter on this story: Andre Soliani in Brasilia at [email protected]
Last Updated: October 23, 2008 13:05 EDT
By Andre Soliani and Jamie McGee
Oct. 23 (Bloomberg) -- Brazil's central bank pledged to sell $50 billion of currency swaps, its boldest move yet to stem a two-month, 28 percent tumble in the real that has saddled companies with losses and sparked concern inflation will surge.
The real soared after the announcement, climbing 3.9 percent and erasing an initial slump of as much as 5.8 percent. The currency's losses had quickened this week -- it sank 11 percent the past two days -- amid concern that the global financial crisis will drive neighboring Argentina to default for the second time this decade.
Brazil's $50 billion swap sale plan dwarfs the size of its previous interventions in the currency market, a sign policy makers are worried the real's tumble will bankrupt companies in Latin America's biggest economy. Those concerns stem in part from the collapse in Mexico of retailer Controladora Comercial Mexicana SAB this month following a rout in the peso.
Brazil has ``been aggressive, ahead of the curve compared to other central banks,'' said Gerardo Margolis, a vice president for emerging markets at TD Securities Inc. in Toronto. He said the $50 billion swap sale plan will help shore up the real for at least a few days. ``It's a huge number.''
Policy makers pumped the equivalent of $22.9 billion into the foreign exchange market from Oct. 8 to Oct. 20 in the form of swap sales, dollar loans and outright dollar sales, central bank President Henrique Meirelles told a congressional committee in Brasilia on Oct. 21.
`Forceful Approach'
The central bank followed up today's announcement by selling $2.3 billion worth of swap contracts and buying an unspecified amount of reais. The bank said in a statement it will hold further swap auctions to meet ``liquidity needs'' in the market. The swap contracts support the real by providing investors a hedge against its decline.
``The central bank is taking a forceful approach,'' said Vladimir Caramaschi, chief strategist at Credit Agricole do Brasil. The swap offer ``is another exit for those who need to cancel hedging positions.''
The real rose as much as 6.2 percent to 2.24 per dollar today. It traded at 2.2887 at 12:09 p.m. New York time, from 2.379 yesterday. The real plunged early in the day, falling to as low as 2.526 per dollar after Standard & Poor's said it may cut Russia's debt rating.
``You have Argentina, the Russia downgrade,'' said Flavia Cattan-Naslausky, an interest-rate and currency strategist at Royal Bank of Scotland in Greenwich, Connecticut. ``Everyone is questioning who is next.''
Commodities Slump
The real has sunk 32 percent from a nine-year high of 1.5545 reached on Aug. 1 as the global crisis has driven down prices on the country's commodity exports and eroded demand for higher-yielding, emerging-market assets. Only the South African rand, down 35 percent, has fallen more over that time.
Brazil had foreign currency outflows of $3.39 billion between Oct. 1 and Oct. 21, central bank economist Altamir Lopes told reporters today in Brasilia. In September, before the global crisis deepened, the country received $2.8 billion in inflows from trade and investments.
President Luiz Inacio Lula da Silva, seeking to reverse those outflows, eliminated today a financial tax on foreign investors' purchases of fixed-income securities and loans. Lula scrapped the tax, known as IOF, of 1.5 percent on foreign investors' purchases of some financial products and of 0.38 percent on foreign-currency loans, according to the Finance Ministry.
``This makes a lot of sense,'' Cattan-Naslausky said. ``No one likes capital controls.''
To contact the reporter on this story: Andre Soliani in Brasilia at [email protected]
Last Updated: October 23, 2008 13:05 EDT
