SAO PAOLO - Brazil's central bank announced a currency-intervention program on Thursday that will provide $60 billion worth of cash and insurance to the foreign-exchange market by year-end, a move aimed at bolstering the country's currency, the real, as it slips to near five-year lows against the dollar.
The bank said in a statement it will sell, on Mondays through Thursdays, $500 million worth of currency swaps, derivative contracts designed to provide investors with insurance against a weaker real. On Fridays, it will offer $1 billion on the spot market through repurchase agreements.
Both are designed to prevent companies and individuals with dollar obligations from scrambling to the market at the same time, afraid that waiting will force them to pay more to buy dollars. When that happens, the real tends to weaken further and faster.
"This shows the firm determination of monetary authorities to keep the exchange rate from slipping further," said Andre Perfeito, chief economist with Gradual Investments in São Paulo.
The program starts on Friday and runs until December, the central bank said, adding it may announce additional auctions if it sees fit.
The move comes as the government seeks ways to control inflation and keep the real from sliding while at the same time trying to kick-start an economy that has stagnated despite a rapid expansion of credit. While a weaker real can help Brazil's export of commodities and manufactured goods, it makes raw materials and other imports more expensive, helping drive inflation higher.
Brazil cut its outlook for gross domestic product (GDP) growth to 2.5 percent from 3 percent in 2013 and to 4 percent from 4.5 percent for 2014, Finance Minister Guido Mantega said in an interview with Brazil's Globo Television Network late on Thursday.
For Perfeito, the move signals the central bank's intention to limit interest rate hikes. In addition to controlling inflation, higher rates would attract investment to Brazil, helping the real firm against the dollar. At the same time higher rates could also slow growth by making borrowing more expensive.
"I think that this is an effort to adjust expectations a bit because $60 billion is a lot," Perfeito said. "This kind of attitude just before a Copom meeting shows that exchange rate controls won't be carried out only through monetary policy."
The bank's Copom monetary policy committee, which sets Brazil's benchmark rate, meets on August 28.
Interest-rate futures contracts suggest that there is a 76 percent chance that the central bank will raise the benchmark Selic target rate half a percentage point to 9 percent and a 24 percent chance of raising it 1.25 percentage points to 9.25 percent, according to Thomson Reuters data.
The real's weakening and the Copom meeting come as the United States' central banking authority, the Federal Reserve, is moving closer to ending a bond-buying program that has injected billions into the U.S. economy driving down interest rates.
As a result investors have been searching for higher-yielding, emerging market securities.
With the end of the Fed's "quantitative easing" program expected soon, capital flows have flowed out of emerging markets such as Brazil and back to the United States and other developed countries, helping to weaken the real.
"Today, the big problem is there is a structural change (in the world economy)," said Eduardo Velho, chief economist with Miami-based investment bank INVX Global Partners LLC, in São Paulo. "The central bank's move is an important measure to reduce volatility and slow the pressure on the exchange rate. I see this as positive."
On Thursday Brazil's real firmed 0.1 percent to 2.4305 reais to the dollar.
source: interaksyon.com
