Reuters: US Dollar Report: UPDATE 2-Real drops for 6th day as Brazil struggles to halt FX rout

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UPDATE 2-Real drops for 6th day as Brazil struggles to halt FX rout Aug 20th 2013, 01:03 Mon Aug 19, 2013 9:03pm EDT * Brazilian currency falls 0.9 percent to 2.4152 per dollar * Investors bet on more aggressive rate hikes to curb inflation * Central bank chief warns against one-way bets on currency * Treasury says working with cenbank to stabilize market By Walter Brandimarte and Luciana Otoni RIO DE JANEIRO/BRASILIA, Aug 19 (Reuters) - Brazil's real weakened for a sixth straight session on Monday even as the central bank and the Treasury joined forces to stem a rout in currency and bond markets that has added to inflation fears in Latin America's largest economy. Worried that policymakers may have to step up their monetary tightening campaign against inflation, investors pushed interest-rate futures sharply higher while dumping locally-issued government bonds. (See table below) As a result, Brazil's domestic yield curve now shows a 50 percent chance that the benchmark Selic rate may rise by 75 basis points next week, and not the half percentage point most economists had forecast. While most emerging market currencies have been affected by fears of an expected withdrawal of U.S. stimulus measures, Brazil has been specially hard-hit as its slow-growing economy has fallen out of favor with investors. After a series of government interventions designed to prop up the economy, many of which have backfired, Brazil's economy is now expected to grow only 2.2 percent this year and 2.5 percent in 2014, according to the average estimate of private economists. While a government source told Reuters on Monday that a persistently weak economy will help keep inflation in check, central bank chief Alexandre Tombini suggested bets on a more aggressive monetary tightening are exaggerated. "The recently observed moves in interest rate markets incorporate excessive premium," he said in a statement. Tombini also tried to soothe markets by reassuring that the central bank will keep offering protection against currency volatility and warned investors against one-way bets on the real, saying they could incur "losses." Echoing his comments, Finance Minister Guido Mantega later advised investors to avoid big bets against the real, saying that the Treasury and the central bank are working together to stabilize Brazilian markets. "It's only natural that investors want to make money, but they could lose money in the future," Mantega told reporters in Sao Paulo, adding that Brazil has a free-floating exchange rate that "fluctuates in both directions." Tombini's and Mantega's comments came only after markets had closed, however, too late to stop the real from closing at its weakest level since March 2009. The Brazilian currency slid 0.9 percent to 2.4152 per dollar, adding to last week's losses of more than 5 percent. "The next resistance level is around 2.5 per dollar," said Caio Sasaki, an analyst with XP Investimentos in Sao Paulo. "The sell-off is due to investors' skepticism about our fundamentals. There are better (investment) opportunities coming in the United States." Citi strategists said some analysts already expect the real to weaken to between 2.50 and 2.70 per dollar through the end of the year. "The horizon is still cloudy (for the real), with the fiscal and economic situation remaining the same," they wrote in a note to clients on Monday. COORDINATED ACTION The real continued to slide even after the central bank sold about $3.5 billion worth of traditional currency swaps in three separate auctions and announced it will sell on Tuesday as much as $4 billion on the spot market through repurchase agreements. Swaps are derivatives sold by the central bank in the futures market to provide investors with protection against a further depreciation of the real. They are part of a government strategy to ease demand for dollars without burning the country's $370 billion in foreign reserves. Still, many analysts say that strategy has run its course as companies are unwilling to hedge again currency risk at current exchange rate levels. Instead, they say, demand is growing for dollars on the spot market. With Tuesday's auction of spot dollars, the central bank will try to satisfy that demand without using its foreign reserves, since the greenbacks will return to the bank's coffers on Jan. 2 and April 1. While the central bank tried to stabilize the foreign exchange market, the Treasury conducted an unplanned auction to buy and sell fixed-rate notes that have also been suffering from the increased volatility in Brazilian financial markets. "We have seen very high volatility over the past three days, with traders demanding very high returns for Brazilian bonds in the secondary market as the real weakened," a second government source said. Another government source said the Treasury will make as many extraordinary auctions as needed to stabilize the country's secondary debt market. The Treasury and the central bank are working in a coordinated fashion to reduce volatility in the currency and the interest-rate markets, the previous source said. Most-traded interest rate DI contracts at close: Month Ticker Last(pc Previous Change t) Close(pct) (p.p.) OCT3 8.692 8.666 0.026 JAN4 9.33 9.2 0.13 JAN5 10.66 10.33 0.33 JAN6 11.53 11.18 0.35 JAN7 11.84 11.61 0.23 Link this Share this Digg this Email Reprints

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