Brazil Real Gains on Swap Concern; Mexico Up: Latin Currencies
June 5 (<a href=quote.bloomberg.com>Bloomberg) -- Brazil's real rose for a third day after yesterday's central bank sale of contracts used to protect investors from a decline in the currency, reducing the demand for dollars.
The real gained 1.4 percent to 2.8745 per dollar in Sao Paulo at 1:51 p.m. New York time from yesterday's three-week closing high. The real has gained 23 percent in 2003, the best performance of the 16 most traded currencies. Mexico's peso rose.
Investors, primarily bank Treasury desks, have more bets the real will fall than it will rise, said Helio Ozaki, a trader with Finambras Corretora de Cambio e Titulos Ltda., a Sao Paulo brokerage that handles more than a quarter of all Brazilian spot- market currency trades. The central bank's sale yesterday of the currency protection made it less likely demand for dollars will rise allowing their bets to pay off.
The central bank slapped a lot of people yesterday,'' Ozaki said. There are about 30,000 more dollar futures contracts out there betting the dollar will strengthen than weaken -- yesterday's sale has pulled the rug out from them and made anyone else ready to bet against the real think twice.''
Many treasury desks were forced to stop adding to their positions yesterday, said Flavio Farah, head of the Treasury desk at the Sao Paulo unit of Dusseldorf, Germany-based Westdeutsche Landesbank Girozentrale.
Betting against the real right now makes no sense,'' Farah said. It's going to be a while before we figure out just what to do for the medium term.''
Inflows
In the meantime, capital flows to the country continue, boosting demand for the real and helping it rise. More than $8 billion of bonds and loans have been contracted abroad this year, according to the O Globo daily newspaper, helping the real outperform all the world's major currencies.
Yesterday, Banco Votorantim SA, the financial services arm of the Sao Paulo-based Votorantim cement, mining, banking and industrial group sold $180 million of two-year bonds to yield 6.25 percent.
Telesp Celular Participacoes SA, based in Sao Paulo and Brazil's biggest cellular telephone service provider, said it plans to sell $150 million of 18-month bonds. Telesp Celular Par is controlled by Vivo, a joint-venture between Madrid-based Telefonica SA and Lisbon-based Portugal Telecom SGPS SA.
Also boosting investor sentiment, Alain Belda, the chief executive of Pittsburgh-based Alcoa Inc., the world's biggest aluminum maker, said his company plans a new power plant in Brazil and will invest $2.7 billion in Brazil over the next seven to eight years.
Capital flows remain strong and the swap sale makes it easier for the flows to cause the real to rise,'' Ozaki said. There are few forces now preventing the dollar from weakening'' against the real.
Inflation Comments
The real's rise may also have been helped by comments today from central bank President Henrique Meirelles.
The inflation rate for the previous 12 months will fall to 10.8 percent, within the range the government has set as a target for this year, by the end of 2003, he said during a visit to investors in Berlin, according to newswire Agencia Estado.
A stronger real will help reduce inflation by reducing the costs of imports and commodities, which are priced in dollars.
Interest rates also fell on expectation lower inflation may give the government room to cut its benchmark target rate at central bank monetary policy committee meetings June 17 and 18.
The overnight interest-rate futures contract for Jan. 2 settlement, the most-traded interest-rate futures contract on Sao Paulo's BM&F futures and commodities exchange, fell for a fifth day in seven, losing 1 basis point to 23.83 percent. The contract indicates investor expectations for the end of December. A basis point is 0.01 percentage point.
Rate Backdrop
In coming days expectation the U.S. will cut interest rates may lift the real further. Much of the rally in Brazilian bond prices in recent months has been fueled by U.S. and European investors seeking higher returns than they can receive at home.
Fitch Ratings' upgrade of the outlook on Brazilian debt to positive from stable may add to the demand for Brazilian investments even as the perception of default risk on $400 billion of government debt falls along with borrowing costs.
Brazilian banks have taken advantage of low U.S. rates -- yields on two-year U.S. Treasury bonds fell to a 53-year low of 1.198 percent this week -- to invest at Brazilian rates. Brazil's benchmark 26.5 percent rate is at a four-year high.
Lower U.S. rates could maintain the difference between U.S. and Brazilian rates that has sparked the bank bond sales even if Brazilian rates were to fall.
Investors are focusing on the possibility of another U.S. interest rate cut by the Federal Reserve as soon as its June 25 meeting, said Daniel Katzive, a currency strategist at UBS Warburg, the biggest trader in the $1.2 trillion-a-day foreign exchange market, in Stamford, Connecticut. ``The currencies that have done best are the ones with the highest yield.''
Brazil's benchmark 8 percent bond maturing in 2014 gained 1.19 cents to 91.50 cents on the dollar, causing the yield to fall to 10.07 percent, according to J.P. Morgan Chase & Co. The bond rose to a record high of 91.75 on May 13.
Mexico
The peso rebounded from its biggest plunge since Brazil devalued its currency in January 1999 by gaining for the first day in three.
The peso strengthened 0.2 percent to 10.5516 per dollar from yesterday's 10.5725 per dollar close, when it fell 2.8 percent, the currency's largest one-day decline since Jan. 13, 1999.
Colombia's peso rose from a three-week high, rising 0.2 percent to 2,835.48 per dollar. The Argentinean and Chilean currencies were unchanged. Peru's new sol weakened 0.1 percent to 3.4840 per dollar. Venezuela fixed it bolivar at 1,598 this year.