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Brazil's Real Rises as Fed Cut Boosts Local Yield Advantage
By Alex Lange and Telma Marotto
March 18 (Bloomberg) -- Brazil's real strengthened the most in almost two months as the
Federal Reserve's cut in the benchmark U.S. lending rate boosted the yield advantage of
local fixed-income securities.
“The market outlook for the real in the short term is positive,” said Tony Volpon, chief
economist at CM Capital Markets in Sao Paulo. “If it's positive for the currency, it's going
to be positive for fixed income.”
The real rose for the first time in four days, increasing 1.95 percent to 1.6891 BRL/USD at
3:30 p.m. New York time, from 1.7226 BRL/USD yesterday. It's the biggest gain since Jan.
24, two days after the Fed made an emergency cut in the target rate.
The currency dropped 0.6 percent yesterday after the Fed, in an emergency weekend
decision, cut the rate on direct loans to commercial banks and opened up borrowing at the
rate to primary dealers in government securities. The Fed also brokered the purchase of
Bear Stearns Cos. by JPMorgan Chase & Co.
Fed policy makers today cut the benchmark U.S. interest rate today by three-quarters of a
percentage point to 2.25 percent to support financial markets.
Brazil's currency gained even as the country's central bank bought U.S. dollars in the spot
market, part of a strategy to increase international reserves and slow the real's gains. The
bank bought dollars for 1.7059 BRL/USD apiece in an auction.
Volpon predicted the Brazilian central bank will be forced to raise its benchmark interest
rate 50 basis points, or a half- percentage point, to 11.75 percent as domestic demand
increases for foreign goods.
Real's Gain
The real has gained 23 percent against the dollar over the past 12 months as rising
commodity exports and purchases of local financial assets swelled dollar inflows.
“There's a certain demand for commodities that will not cool down in the short term,” said
Ian Cao, who helps manage about BRL 3 billion (USD 1.78 billion) in assets as a fixedincome manager at Rio de Janeiro-based Icatu Hartford. “That makes us confident in the
capital inflows.”
Brazilian exports rose to USD 3.5 billion in the week ended March 16 from USD 3.3
billion the previous week, the government said yesterday. The trade surplus in the week
reached USD 527 million. Commodity exports may reach USD 100 billion this year, a 33
percent increase from 2007, the Folha de S. Paulo newspaper reported on March 16, citing
specialists it didn't name.
Brazil's economy hasn't been hurt by the deepening international credit squeeze, Finance
Minister Guido Mantega said yesterday.
`Safe Harbor'
“Brazil is a safe harbor,” Mantega told reporters in Brasilia yesterday. The benchmark
lending rate is 11.25 percent, 9 percentage points above the Fed's overnight target.
The yield on Brazil's overnight interest-rate futures contract for January delivery held today
at 12.22 percent, almost 1 percentage point above the target rate. Brazil's central bank is
scheduled to discuss interest-rate policy on April 15.
The yield on Brazil's zero-coupon bond due in January 2009 fell 9 basis points, or 0.09
percentage point, to 12.25 percent, according to Banco Votorantim SA.
Latin America Currencies
Peru's sol jumped 0.5 percent to 2.803 PEN/USD from 2.816 PEN/USD yesterday. It
touched 2.8027 PEN/USD , its strongest level since March 1998. The central bank bought
USD 126 million in the foreign exchange market in a bid to ease gains in the sol. The yield
on Peru's 8.6 percent sol-denominated bonds due in August 2017 was little changed at 6.58
percent, according to Banco BBVA Continental.
Venezuela's bolivar weakened 2.3 percent to 4.4 VEB/USD in the unregulated market
from 4.3 VEB/USD yesterday, traders said. The government pegs the currency at an
official exchange rate of 2.15 VEB/USD under restrictions imposed in 2003. Venezuelans
turn to the parallel market when they can't get approval from the government's Foreign
Exchange Administration Commission to buy dollars at the official rate.
Other currency markets in Latin America also closed before the Fed decision. Chile's peso
rose 0.5 percent to 431.85 CLP/USD from 434.14 CLP/USD yesterday. The yield on
Chile's 6 percent bonds due in March 2017 rose 6 basis points to 6.63 percent, according to
Chile's Commerce Exchange.
The spread between the Chilean and U.S. benchmark lending rates, now at its widest since
February 2002, has helped fuel a 15.6 percent increase in the Chilean peso this year. That's
the biggest gain among 26 emerging-market currencies tracked by Bloomberg.
Argentina's peso rose 0.05 percent to 3.1465 ARS/USD, from 3.148 ARS/USD yesterday.
The yield on the nation's 5.83 percent inflation-linked peso bonds due in December 2033
fell 3 basis points to 9.13 percent, according to Bloomberg prices.