Brazil Real Gains on Swap Sale; Mexico Rises: Latin Currencies
June 5 (<a href=quote.bloomberg.com>Bloomberg) -- Brazil's currency rose to its highest close in almost 11 months after the central bank sold contracts used to protect investors from a decline in the currency, reducing demand for dollars.
The real rose 2.0 percent to 2.8575 per dollar in Sao Paulo, its highest closing price since July 18. The real has gained 24 percent in 2003, the best performance of the 17 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 insurance 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.''
Bond Sales
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.
The real got an added lift in afternoon trading in Sao Paulo after Banco Safra SA said it plans to sell at least $75 million of two-year bonds to yield 5.5 percent to 5.75 percent. Morgan Stanley has been hired to manage the sale.
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.
Car Exports
Brazil's auto manufacturers said exports of automobiles rose 8.6 percent in May to 50,400, the highest monthly amount since at least June 1997, from 46,395 in April.
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.
A stronger real will help reduce inflation by reducing the costs of imports and commodities, which are priced in dollars.
In Brazil's capital, Brasilia, a committee of Brazil's lower house of Congress said a bill to limit pension expenses is constitutional, moving forward plans designed to help the government eventually reduce its $400 billion debt. Reduced default risk may make investors more willing to invest in Brazil.
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.
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 1.06 cent to 91.38 cents on the dollar, its highest close ever, causing the yield to fall to 10.11 percent, according to J.P. Morgan Chase & Co.
Mexico, Regional Currencies
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 0.3 percent to 10.5433 per dollar from yesterday's 10.5725 per dollar close, when it fell 2.7 percent, the currency's largest one-day decline since Jan. 13, 1999.
Colombia's peso rose 0.1 percent to 2,838.50 per dollar. The Argentinean and Chilean currencies were little changed. Peru's new sol weakened 0.1 percent to 3.4837 per dollar. Venezuela fixed its bolivar at 1,598 this year.