Brazilian Currency Weakens, Investors Avoid Long-Term Real Contract
Brazilian Currency Weakens, Investors Avoid Long-Term Contract
(Updates to rewrite throughout, includes more money market
trader comments and refresh prices.)
Sao Paulo, Jan. 12 (Bloomberg) -- Brazilian investors
refused to trade long-term futures contracts on the real,
concerned Brazil may be forced to weaken the currency to ease
interest rates and stem capital flight.
''Things are not good at all,'' said Alexandre Horstmann, a
money market trader at Banco Marka SA in Rio de Janeiro. ''Rates
soared and nobody wants to trade the real. Investors are afraid
Brazil simply won't meet all its commitments with the IMF.''
In Brazil's futures market, which normally trades currency
contracts of up to two or three months, there were no takers on
the contract that expires in April.
This underscores the growing concern about Brazil's ability
to protect the currency, as rates soar, stocks tumble and
investors pull money out of the country.
The foreign exchange contract for February and March
delivery, the only two contracts traded today, rose. The February
contract rose to 1.222.5 reais against the dollar, from 1.222
yesterday, while the March contract rose to 1.2395, from 1.2385.
The April contract traded Monday at 1.258 to the dollar.
The real trades within a narrow trading band set by the
central bank. The bank is expected in the next few weeks to make
its periodic adjustment to the band, as the currency, which
traded today at 1.211 to the dollar, is close to the ceiling of
1.22 reais to the dollar. The band was last adjusted Jan. 19 of
last year.
This has prompted speculation the government may adjust its
currency system, opting for a wider trading band, allowing for a
freer float of the real, or pegging the currency to the dollar,
perhaps through a currency board.
This would allow Brazil to bring down interest rates -- now
among the highest in the world at 29 percent after inflation --
which are choking the economy.
''The worry is that if the government can't manage to
contain this break with expected interest rate trends, it will
have to take some more drastic action,'' such as a weaker
currency, said Sergio Machado, money market trader at Banco
Fator.
Rates Climbing
Interest rates soared, on concern a debt dispute between the
central government and several state government may undermine
Brazil's ability to slash its budget deficit and bring down
rates. The benchmark stock index fell 8.3 percent.
The rate on one-day certificates of deposit for March
delivery, the most actively traded interest rate futures contract
on Sao Paulo's BM&F commodities and futures exchange, soared 522
basis points to 37.46 percent, the highest level since last
October, when rates were traded at 39 percent. The contract
reflects interest rate expectations for March, and indicates
investors don't expect Brazil to reduce rates anytime soon.
Last week, Minas Gerais state said it ran out of cash and
won't make payments for at least three months on the 18.5 billion
reais ($15.3 billion) of debt it owes the central government.
If Minas Gerais doesn't pay its debt, other states may
follow suit, threatening the country's efforts to cut by almost
half its $64 billion budget deficit this year and meet its
commitments with the International Monetary Fund.
''Rates won't come down until investors know for sure the
states will meet their debt obligation with the federal
government,'' said Mauricio Zanella, a money market trader at
Lloyds Bank Plc.
Elsewhere in the markets, the rate on one-day certificates
of deposit remained unchanged at yesterday's 28.87 percent.
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