Brazil Real Ends Weaker As Market Mulls G-20, Intervention Outlook

Brazil’s real gave up ground to end weaker Monday as investors took a cautious stance ahead of a meeting of Group of 20 leaders and possible moves by governments to intervene in currency markets.

The real ended at BRL1.6977 to the dollar on the Brazilian Mercantile and Futures Exchange after ending at BRL1.6793 to the dollar Friday.

Traders noted the local currency gave back gains seen late last week as investors positioned themselves for possible maneuvering by global financial authorities.

Leaders from the G-20 developed and developing nations are set to meet in South Korea this week to discuss a resolution for recent rounds of competitive currency devaluations among countries that have been dubbed “currency wars.”

So far few concrete policy recommendations have been aired by G-20 authorities, and those that have emerged, including a plan for current account coordination pitched by U.S. Treasury Secretary Timothy Geithner, have been met with skepticism.

If no joint effort is produced at the meeting, however, market players expect individual governments to step in with their own actions.

“If nothing comes of the G-20 meeting, Brazil’s government has signaled that it can and will take more action to prevent the strengthening of the real,” said a trader at a Rio de Janeiro-based brokerage.

Brazil’s currency has strengthened about 30% against the dollar since early 2009 under the influence of heavy flows of incoming foreign portfolio investment.

To halt the trend, the government last month raised its financial operations tax, known as the IOF, on incoming fixed-income investment to 6% from 2% previously.

The government has suggested that further measures, such as more taxes, intensified government dollar purchases, sales of real-denominated bonds, and sales of reverse currency swaps, could be taken if the strengthening of the real continues.

Analysts note the strong real has hurt prospects for Brazil’s exports and productive sector investment.

Locally, meanwhile, the latest data released Monday suggested Brazil’s economy would continue to provide an attractive environment for incoming investment in coming months.

The Brazilian Motor Vehicle Manufacturers Association, or Anfavea, Monday reported October vehicle sales reached 303,172, up 3% from October 2009.

Additionally, a weekly market survey released by the country’s central bank showed the median forecast for growth of industrial production next year rose to 5.25% from 5.20% seen previously. The same survey shows Brazil’s economy expanding by 7.6% in 2010 and by 4.5% in 2011.

At the same time, expectations for inflation continued to rise, with forecasters raising projections for the IPCA consumer price index this year to 5.31% from 5.29% seen previously. The projection remains well above the government’s year-end inflation target of 4.5%, and could bring further pressure on the country’s central bank to raise its reference Selic interest rate from a current 10.75%.

Brazil’s central bank, meanwhile, did its part to try to weigh in against the strong real Monday with two spot market dollar-purchase auctions. The bank bought an undisclosed quantity of dollars at BRL1.6970 and BRL1.6980 per dollar at separate auctions during the session.

In local interest-rate futures trading Monday, yields on short-end contracts were influenced by talk in markets that Brazilian President-elect Dilma Rousseff might try to force interest rates lower with personnel and policy changes at the central bank.

The rate on the January 2012 futures contract fell to 11.42% from 11.47% Friday.

Yields on longer contracts, however, made opposite movements amid the conclusion that investors would react to forced government policy moves.

The yield on the January 2013 contract rose to 11.90% from 11.88% at the previous close.

Brazil’s interbank overnight rate, meanwhile, remained unchanged at 10.64%.