Mantega Market Actions Meant to Slow Real Rally: Brazil Credit

Brazil is stepping up efforts to stem a three-month currency rally as a planned $32 billion share offering by state-run Petroleo Brasileiro SA drives the real to the strongest level since January.

Finance Minister Guido Mantega told investors in a Sept. 9 speech that he wouldn’t “allow” the real to keep gaining as central bank traders boosted dollar purchases in the foreign- exchange market. The bank held two daily auctions on three days last week to buy dollars, marking the first time since May that it opted for more than one round of purchases.

Speculation is mounting that policy makers will take additional measures to weaken the real and shore up exports after the country’s current account deficit swelled to a record in July. BNP Paribas predicts the central bank may buy dollars in the futures market for the first time in 16 months while Bank of America Corp. says the Finance Ministry could purchase the U.S. currency with its sovereign wealth fund.

“Policy makers are sending signals that they are ready to increase ammunition,” said David Beker, who heads Latin America strategy at Bank of America in New York. “There are signs that they are not happy with what’s going on.”

The real gained for a fourth straight week as Brazilian companies issued $4.4 billion of international bonds, the most since October, and traders prepared for a surge in dollar supply from foreigners participating in this month’s Petrobras sale.

‘Inappropriate Gains’

The currency has climbed 5.1 percent in the past three months to 1.7222 per dollar, extending its advance since January 2009 to 34 percent as Latin America’s biggest economy heads to its fastest expansion in 15 years. Central bank President Henrique Meirelles has raised the benchmark lending rate 200 basis points, or 2 percentage points, this year to 10.75 percent to cool growth, luring money to the fixed-income market.

The real touched an eight-month high of 1.7157 per dollar on Sept. 10. The rally swelled Brazil’s annual current account deficit, the broadest measure of trade in goods and services, to $43.8 billion in July from $18 billion in the year-earlier period.

The government will “take the necessary measure to avoid inappropriate gains” in the currency, Mantega, who imposed a 2 percent tax on foreigners’ investment in stocks and bonds last year, said in the Sept. 9 speech in the coastal city of Recife. Three weeks earlier, Treasury Secretary Arno Augustin said in an interview that Brazil may step up dollar buying by using its sovereign wealth fund should the real post “excessive” gains.

Central bankers bought $18.6 billion in the first eight months of the year, more than double the $7.3 billion they purchased in the year-earlier period, according to the bank’s website.

‘More Aggressive’

“The central bank has become more aggressive in the spot market,” said Alvise Marino, an emerging-market currency strategist at Credit Suisse Group AG in New York. “There is a clear possibility that they will step into the futures market.”

Central bank officials called currency traders on July 23 to gauge demand for so-called reverse currency swaps, according to BNP Paribas and Nomura Securities International Inc. The contracts give Banco Central do Brasil the right to sell the real for dollars in the futures market.

The real has gained 3 percent since then, prompting Diego Donadio, a Latin America strategist at BNP Paribas, to say in an interview that the probability of policy makers stepping into the futures markets is rising.

“The central bank doesn’t comment on possible future actions,” the bank said in an e-mailed response to questions.

Mantega’s ‘Warning’

Yields on the interbank rate futures contract due in January declined one basis point last week to 10.66 percent, indicating traders expect the central bank will keep its benchmark rate at 10.75 percent through year-end. The benchmark rate in the U.S., U.K., Japan and the euro-zone is no more than 1 percent.

The extra yield investors demand to own Brazilian dollar- bonds instead of U.S. Treasuries fell one basis point to 212 last week, according to JPMorgan Chase & Co. indexes.

The cost of protecting Brazilian bonds against default for five years rose six basis points to 124, according to CMA DataVision prices. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The real will weaken to 1.8 per dollar by year-end and hold at that level at the end of 2011, according to the median forecast of 18 analysts surveyed by Bloomberg. While Mantega and Meirelles have been unable to weaken the real in recent months, the currency has not breached the 1.7-per-dollar level it was at when the government imposed the 2 percent tax on foreigners in October.

“Mantega is warning the market and is looking for tools to stop the appreciation,” said Luiz Eduardo Portella, a partner in charge of the fixed-income and currency group at Banco Modal in Rio de Janeiro. “They succeeded in the past. They won’t allow the real to strengthen beyond 1.7 per dollar.”