Brazil Real Gains, Paring Weekly Rout, on Currency Tax Removal Speculation

Brazil’s real rose, paring its biggest weekly sell-off since November 2008, on speculation the government may revoke a tax on foreign-exchange derivatives and modify other restrictions to lure investment and stem the rout.

The real advanced 3.9 percent, the most in almost three years, to 1.8339 per dollar at 5 p.m. New York time, from 1.9055 yesterday. The currency touched the weakest level since July 2009 yesterday, prompting the central bank to shore up the real in the futures market for the first time in two years.

The government may adjust or retract the tax, known as IOF, that it imposed on some currency derivatives transactions, scrap limits on bank transactions in dollars and modify a tax on foreign loans, Folha de S.Paulo reported, without saying how it obtained the information. Finance Minister Guido Mantega said at an event in Washington today that the government “for now” isn’t planning to withdraw measures it took earlier this year that aim at weaken the real.

“The tax has created so much confusion and was one of the reasons behind the real’s recent sell-off,” said Mauricio Junqueira, who helps manage about $300 million at Squanto Investimentos in Sao Paulo. “The best thing to do is to just eliminate it and now they have an excuse to do so.”

The real lost 5.5 percent this week, the third-worst performer after South Africa’s rand and Chilean peso among emerging-market currencies, as Europe’s debt crisis and the global economic slump eroded demand for higher-yielding assets.
Derivatives Tax

This week’s plunge extends the real’s slide to 15.2 percent since July 27, when the government imposed the 1 percent tax on derivatives to weaken the real from a 12-year high. The tax reduced currency trading and prevented buyers from coming to the market, said Junqueira.

“We established regulatory measures exactly for that, to add and take away,” Mantega told reporters. “The IOF is one of those, we introduced it, then we can take it away when it’s no longer needed. We are always looking at all the possibilities, but there is no decision.”

More than $3.5 trillion has been erased from equity markets across the world this week, driving global stocks into a bear market as concern mounted that the global economy is sinking into recession. Brazil’s central bank sold currency swaps yesterday, which is the equivalent of selling dollars in the futures market, helping the real rebound from a two-year low.

The South African rand, the Polish zloty and Hungarian forint, which have lost more than 11 percent this month as the worst emerging-market performers, also gained against the dollar today. U.S. stocks rose after The European Central Bank Governing Council members said policy makers may step up efforts to boost growth and ease financial-market tensions as early as next month.
Foreigner Bets

Foreigners have cut their bets on the real’s gain by 85 percent from a record high in July, according to data compiled by Bloomberg based on trading at BM&FBovespa SA, Latin America’s largest securities exchange. The bullish bets in the futures and dollar spread contracts, known as DDI, have dropped to $3.7 billion from $24.6 billion on July 7.

Brazil’s banks held a long dollar position, or bets that the U.S. currency will rise, in the spot market of $3.1 billion on Sept. 21, Tulio Maciel, the central bank’s economic department chief, said to reporters in Brasilia. The banks held $12.7 billion shorts in February. Policy makers took measures to limit lenders’ short-dollar positions in January and July to reduce the risk in the banking system.

Brazil stands ready to provide the necessary liquidity to make sure the foreign exchange markets work “properly,” central bank President Alexandre Tombini said at an event in Washington. Policy makers were correct to reduce leveraged bets against the dollar earlier this year, Tombini said.
Yields Fall

Yields on Brazil’s interest rate futures contracts fell as falling commodity prices reduced concern that the recent currency weakness may limit the room for the central bank to cut interest rates to support economic growth.

Yields on the contract due in January 2013 fell 23 basis points, or 0.23 percentage point, to 10.46 percent. Futures show the central bank will cut the benchmark interest rate about 175 basis points by July, from 12 percent, according to data compiled by Bloomberg.

The central bank cut the benchmark interest rate a half point to 12 percent on Aug. 31, after raising it at the previous five policy meetings, citing a “substantial deterioration” in the global economy. Inflation rose to a six-year high of 7.3 percent in the year through mid-September, above the central bank’s target ceiling of 6.5 percent for a fifth month.
Currency Fluctuations

Yields on contracts maturing in January 2013 jumped 10 basis points on Sept. 21, amid concern that currency weakness may increase prices of imports, preventing the central bank from lowering borrowing costs.

Currency fluctuations have less of an impact on Brazilian consumer prices than they did previously, Tombini said today.

The cost of short-term trade finance for Brazilian investment-grade companies more than doubled this month as European banks retreat from the dollar loan market, according to three people familiar with the matter.

A one-year credit line backed by export contracts costs as much as 2.85 percent now, compared with 1.35 percent in the beginning of September, according to two bankers who asked not to be identified because the terms of the loans are private. It’s the first increase in the cost of trade finance for Brazil’s biggest exporters since the 2008 global credit crunch. The Brazilian central bank may need to provide trade lines as it did in 2008 to help weather the funding shortage, one of the bankers said.