Brazil pares gains; Gov’t mulls futures limits

Brazil’s real pared gains to trade little changed against the dollar on Tuesday after a source told Reuters the government may move to limit currency futures and other derivatives trading.

Measures could include higher taxes on dollar futures contracts DOLc1 and other derivatives used to speculate on or hedge against changes in the real-dollar exchange rate, the source, a member of the government’s economic team, said.

The government is concerned about foreign, nonresident investors who have increased futures-market bets to record highs that the real — already near 12-year highs — will strengthen further. For more information see: [ID:nE5E7H305A]

Brazil’s real closed the day little changed at 1.579 to the dollar, 0.06 percent firmer than on Monday. Before the Reuters report, the real firmed as much as 0.6 percent to 1.575.

“This is what caused the real to make an adjustment,” said Jose Carlos Amado, a trader at Renascenca, a Sao Paulo currency brokerage. “With such measures you’ll take a lot of the liquidity out of the market and make it it a lot smaller.”

The central bank imposed tighter limits on local banks’ bets on a stronger real late Friday. [ID:nN1E7671YO] That move spurred a sharp drop in the real on Monday, but analysts said government measures are unlikely to significantly undermine the attraction of the Brazilian currency.

“Interest rates in Brazil are just too high to stop people from wanting to invest, and rates seem ready to rise further,” said Alfredo Barbutti, economist at BGC Liquidez, a Sao Paulo currency brokerage. “In a world where Europe and the United States worry about default, Brazil also appears stable.”

Brazil’s real has gained as much as 7 percent this year as the benchmark interest rate, now at 12.25 percent, attracts capital from the United States, Europe and Japan, where interest rates are close to zero.

Additionally, growth in developed economies is slow, Europe is scrambling to prevent a potential default in Greece from spreading to Portugal, Ireland, Spain and Italy, and U.S. political deadlock over the country’s budget and debt limit raise the risk it may stop paying creditors in August. [ID:nL6E7IC097]

“The external scenario is terrible right now,” said Ramses Villela, head of currency trading at Bulltick in Mexico City. “Mexico, which is the most liquid of the region’s currencies, is taking the brunt of the bad news.”

Mexico’s peso MXN=D2 slipped 0.38 percent to 11.80 to the dollar after falling nearly 2 percent in early trading.

“Europe’s problems have led to something that resembled panic with selling of one asset leading to the selling of others,” he added. “This has nothing to do with Mexico’s fundamentals.”

The fact that Mexico, a convertible currency, trades overnight also made it a lightning rod for investors wanting to cut Latin American exposure when other markets were closed, Villela said. By the time trading began for the region’s other major currencies, the initial “panic” about Europe had subsided, he added.

Currencies such as Brazil’s real and the Chilean and Colombian pesos may be able to benefit from rising troubles in the developed world, Barbutti said.

“The safe haven currencies, the dollar, the euro, don’t seem as safe as they used to be,” he said. “This could be a benefit going forward.”

Chile’s peso CLP=CL gave up early losses to firm around 0.1 percent to 466.75 to the dollar. Colombia’s peso COP2=STFX gained about 0.3 percent to 1,765.45.

Peru’s sol PEN=PE was little changed, gaining nearly 0.1 percent to 2.7410 to the dollar.

BOND SPREADS WIDEN

Latin American bond spreads, a measure of investor appetite for emerging market debt, widened five basis point, according to the JPMorgan EMBI+ emerging-market bond index 11EMJ.

When the spread widens, investors demand higher returns to hold emerging market bonds compared with other investments.

Investors now demand 2.92 percentage points more to hold emerging-market bonds than comparable U.S. Treasuries, according to the EMBI+.

EMBI+ spreads rose most in Venezuela as the country’s sovereign bonds weakened across the yield curve on Tuesday, putting an end to a three-week rally.

The move broke above a narrow half-year trading range, but has since slipped back now that speculation over the long-term health prospects of Hugo Chavez, the OPEC nation’s socialist president, have been quelled.

His triumphant return to Venezuela after cancer surgery in Cuba put a stop to immediate changes in the political landscape. Questions remain over whether he will be able to mount a full-scale campaign for the 2012 presidential election.

“Markets are just weaker in general and perhaps there is some disappointment that Chavez is not leaving as soon as people had hoped. They are issuing new debt so more supply is expected in the pipeline. All things combined led to a weaker curve in Venezuela,” said Luz Padilla, emerging market fixed income fund portfolio manager at Los Angeles-based DoubleLine.