Brazil Real Gains on Expected Bond Sale Flows: Latin Currencies

May 28 (<a href=quote.bloomberg.com>Bloomberg) -- Brazil's real gained for the fourth day in six on investors' expectations of new capital flows as local industrial companies and banks sell bonds abroad.

The real rose 0.5 percent to 3.0140 per dollar at 2:29 p.m. New York time from 3.028 yesterday. The real has gained 17 percent against the dollar in 2003, the best performance of the 16 most widely traded currencies. Mexico's peso strengthened.

Brazil's Banco Votorantim SA, the finance arm of the Votorantim cement, mining and industrial group, today said it plans to sell at least $100 million of two-year bonds. Banco Bradesco SA, Brazil's third-largest commercial bank, yesterday said it plans to sell $50 million of 18-month bonds, and Cia. de Saneamento Basico do Estado de Sao Paulo, the country's largest water and sewerage company, said it plans to sell $200 million of debt in the next two weeks.

The capital flows are still coming,'' said Flavio Farah, head of the Treasury Dept. at the Sao Paulo unit of Westdeutsche Landesbank Girozentrale. There seems to be a growing feeling the real will hold around 3 to the dollar for the near term.''

Brazilian banks have borrowed the bulk of the more than $5 billion borrowed overseas by corporate Brazil this year. They have taken advantage of low rates abroad, benchmark U.S. Treasury debt yields are at their lowest in more than 40 years, to buy Brazilian government bonds paying yields at four-year highs.

The U.S. 10-year Treasury bond, a benchmark for U.S. borrowing, yields 3.43 percent while the benchmark Brazilian rate is 26.5 percent. Thirteen-month Brazilian, fixed-rate notes were sold to yield 23.54 percent yesterday.

Meirelles

Investor expectations that Brazilian yields may remain high were supported by Brazilian central bank President Henrique Meirelles today, who told a congressional committee in the capital, Brasilia, that inflation has not yet ``controlled.''

The 12-month inflation rate in April was 16.8 percent, nearly twice the governments 8.5 percent target for 2003. Meirelles' comment raised investors expectation rates may not decline after central bank monetary policy meetings next month.

Meirelles is just following a synchronized speech: that they won't bow to pressure unless inflation subdues effectively,'' said Sandra Utsumi, chief economist with BES Securities do Brasil in Sao Paulo. In a way, they are saying `This may not be the right time to cut rates.'''

Overnight interest rates rose in the futures market.

The overnight interest-rate future for Jan. 2 settlement, the most-traded on Sao Paulo's BM&F futures and commodities exchange fell 7 basis points to 24.1 percent. The contract reflects interest-rate expectations for the end of December. A basis point is 0.01 percentage point.

Brazil's 8 percent bond maturing in 2014 fell 0.56 cent to 88.69 cents on the dollar, pushing the yield up to 10.82 percent, according to J.P. Morgan Chase & Co.

Mexico

Mexico's peso rebounded from its biggest decline in four months to rise on investor expectations an economic rebound in the world's largest economy will boost demand for Mexico's exports from its biggest customer.

The peso strengthened 0.4 percent to 10.3825 per dollar after declining 1.8 percent to 10.4225 yesterday, its largest one-day loss since Jan. 21.

The peso on March 6 fell to a record low of 11.2644 per dollar on investor concern U.S. growth might stall this year amid indications the Mexican economy might contract. The U.S. buys about 85 percent of Mexico's exports, accounting for a quarter of its $600 billion economy, and is behind about 70 percent of the foreign investment flow into Latin America's largest economy

The currency fell yesterday after yields on the government's benchmark 28-day Treasury notes fell to 4.91 percent, 1 basis point above the record low reached two weeks ago, prompting some investors to seek higher returns in other markets.

Regional Currencies

Argentina's peso declined for the fourth day in five, losing 0.6 percent to 2.8825 per dollar from 2.8650 per dollar.

Chile's peso weakened for a second day, losing 0.5 percent to 713.85 per dollar, while Colombia's peso strengthened for the first day in three, rising 0.3 percent to 2,857.00 per dollar.

Peru's new sol was little changed at 3.4964 per dollar from 3.4920 per dollar yesterdy. Venezuela fixed its bolivar at 1,598 per dollar earlier this year. Last Updated: May 28, 2003 14:30 EDT