Brazil Real Falls After Auction; Mexico Falls: Latin Currencies

June 12 (<a href=quote.bloomberg.com>Bloomberg) -- Brazil's real fell for the second day in three on investors' expectations the government will reduce the amount of insurance it offers against declines in the real, prompting some investors to buy dollars.

The real fell 0.4 percent in Sao Paulo to 2.8635 per dollar at 3:47 p.m. New York time, after closing yesterday at its highest level since July 17. The real has risen 24 percent in 2003, the best performance of the 16 most widely traded currencies. Mexico's peso declined for the second day in three.

Brazil has insured investors against exchange-rate losses on $58.2 billion of investment by selling interest-rate swaps. At auctions yesterday and today, the central bank refinanced 90 percent of swaps coming due June 18. If it declines to refinance all the maturing contracts, investors may have to buy dollars to lock in a price for expected import and debt payments, causing the dollar to strengthen against the real.

We still don't know if they will refinance more, but with the real at its highest levels this year it makes sense that the government would start cutting its exposure to dollar risk,'' said Jose Roberto Machado Filho, superintendent of the Treasury desk at Banco ABN-Amro Real SA in Sao Paulo. Those who don't think they'll refinance 100 percent are buying dollars.''

Brazil sold $167.2 million of swaps at an auction today and $762.9 million of the swaps at an auction yesterday. It has about $1.1 billion of swaps and dollar-indexed bonds due next week.

Brazil's benchmark 8 percent bond due in 2014 rose 0.50 cent on the dollar to 92.13, paring the yield to 9.92 percent, according to J.P. Morgan Chase & Co.

Mexico

Mexico's peso reversed gains to fall as much as 1.3 percent amid investor speculation on whether Moody's Investors Service would upgrade the country's credit rating, likely boosting investment and reducing Mexican companies' borrowing costs.

The peso slid for the second day in three in Mexico City and U.S. trading, declining 0.8 percent to 10.6595 per dollar from 10.5730 yesterday. The peso has declined 2.7 percent in 2003, the worst performance of the 16 most widely traded currencies.

The market had discounted the upgrade yesterday before knowing the facts,'' said Omar Martin del Campo, a currency trader at Arka Casa de Bolsa SA in Mexico City. After the news was denied, the peso moved and it moved fast because there's little volume.'' Any buy or sell orders are moving the market more than usual because many foreign currency traders are at a convention in Puerto Vallarta, Martin said.

Rating

An upgrade by Moody's from Baa2 to Baa1, three levels above investment grade, would generate more investment in the country by making bonds issued by the Mexican government and some Mexican companies more attractive for investors.

Moody's in March raised Mexico's outlook to positive, which means it may raise its ratings, because of improved management of its $150 billion foreign and local debt.

Moody's in Mexico said it hadn't made any official statements. Sovereign analysts Mauro Leos and Luis Ernesto Martinez Sales were not in their offices in New York.

The peso future contract for June delivery traded on the Chicago Mercantile Exchange fell for the first day this week, declining 0.9 percent to 9.3650 cents per peso.

Colombia's peso extended its 1.2 percent June rally, rising 0.1 percent to 2,823.00 per dollar in Bogota trading from 2,827.00 per dollar yesterday. The peso has risen 1.6 percent this year, after a 21 percent slide in 2002.

Argentina's peso fell for a second day, losing 0.5 percent to 2.8375 per dollar in Buenos Aires from 2.8225 per dollar yesterday, paring its gains in 2003 to 18 percent, the second-best performance among the 59 currencies tracked by Bloomberg.

Peru's new sol strengthened for a second day, gaining 0.1 percent to 3.4805 per dollar from 3.4828 per dollar in Lima trading.

Venezuela this year fixed its bolivar at 1,598 per dollar.

Chile

Chile's peso had it biggest gain in more than two months as domestic pension funds sold dollars to invest in Chile's stock market.

The peso rose for a second day, adding 1 percent to 707.55 per dollar after yesterday's 0.4 percent gain to 714.35 per dollar yesterday in Santiago trading. The currency has risen 1.8 percent in 2003.

Chilean pension funds are selling dollars to fund increased investment in the domestic stock market, which has rallied 28 percent in local currency terms this year, said Eduardo Machuca, a currency trader at Santiago brokerage Intervalores Ltd.

Santiago's IPSA Index's gains this year make it the fifth- best performer in local currency terms among 61 tracked by Bloomberg.