Real Swings Ease as Rousseff Surprises Barclays: Brazil Credit

Swings in the Brazilian real are declining to a two-year low ahead of presidential elections as the central bank steps up dollar purchases to offset a surge in investment in the country’s stock and fixed-income markets.

Implied volatility on one-month options for the real versus the dollar, which reflects traders’ expectations for currency fluctuations over the next month, dropped to 10.93 percent yesterday from 18.38 percent at the end of May. The gauge touched 10.57 percent on Sept. 10, the lowest since September 2008. The decline is the biggest among 23 emerging-market currencies tracked by Bloomberg.

The plunge in volatility before the Oct. 3 vote to replace President Luiz Inacio Lula da Silva surprised analysts at Barclays Plc, who predicted in June that currency swings would pick up as the real weakened ahead of elections. Dilma Rousseff, Lula’s chosen successor, has built a “strong” advantage over her rivals, damping concern that the next government will alter the policies that fueled the fastest growth since 1986, said Roberto Melzi, a Barclays strategist.

“Dilma is continuity,” Melzi said in a phone interview from New York. “What surprised us is that the campaign was less heated. Dilma opened up a lead from early on.”

The cost of protecting Brazilian bonds against default for five years fell two basis points yesterday to 114, the lowest level in almost seven weeks, 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.

Petrobras Offering

Rousseff, a 62-year-old economist who served as energy minister and chief of staff under Lula, has a 22 percentage- point lead over Jose Serra, according to a survey conducted last week by Sao Paulo-based Ibope for TV Globo and O Estado de S. Paulo.

Rousseff had the support of 50 percent of the 3,010 people polled nationwide between Sept. 21 and Sept. 23 while Serra, a former Sao Paulo governor, had 28 percent, according to Globo and Estado. The survey has a margin of error of 2 percentage points.

Fading election concerns helped state-run oil company Petroleo Brasileiro SA raise $70 billion in a record share offering last week. The central bank has been boosting its intervention in the foreign-exchange market to offset the dollars that investors moved into the country to participate in the share offering. Central bank President Henrique Meirelles said on Sept. 24 in New York that the Petrobras sale was luring “considerable” foreign investment.

‘Currency War’

Banco Central do Brasil bought $5.9 billion in the first 12 days of September, the most in 11 months, according to Altamir Lopes, head of the bank’s economic department. The bank has purchased dollars every day since July 9, swelling its foreign reserves to a record $274 billion.

“The market knows that every day the central bank is going to buy dollars from them,” said Flavia Cattan-Naslausky, emerging markets strategist at RBS Securities Inc. in Stamford, Connecticut. “In the longer term, that tends to reduce volatility. That’s the impact of an intervention strategy.”

Policy makers are trying to curb a four-month rally that has pushed the real up 6.1 percent to 1.7106 per dollar. It’s gained 35 percent since the end of 2008.

Finance Minister Guido Mantega, who’s seeking to shore up exports after the current account deficit reached a record $45.8 billion in August, said yesterday in Sao Paulo that the government will buy up “excess dollars” and may impose a tax on short-term, fixed-income investment. The government implemented a 2 percent tax in October on foreign investment in the stock and bond markets.

GDP Surge

Mantega said countries are engaging in a “currency war” to weaken their exchange rates and bolster their economies.

“We’re already buying a bigger volume of currency — we’ll keep buying,” Mantega told reporters in Sao Paulo. “We are experiencing a currency war. Devaluing currencies artificially is a global strategy.”

The real is also gaining as record low borrowing costs in the U.S. and Europe prompt investors to seek higher returns in faster-growing developing nations.

Brazil, Latin America’s biggest economy, will expand more than 7 percent this year for the first time since 1986, according to a central bank survey of analysts released yesterday. The central bank has raised the benchmark lending rate 200 basis points, or 2 percentage points, since April to 10.75 percent to drive inflation down to its annual target of 4.5 percent. Brazil’s benchmark rate is more than 900 basis points higher than the key rates in the U.S. and euro zone.

‘Never Bearish’

The real touched a nine-month high of 1.7031 on Sept. 14. Economists forecast it will weaken to 1.78 per dollar by December before rebounding to 1.7 at the end of 2011, according to the median estimate in Bloomberg surveys. Barclays predicts it will gain to 1.7 per dollar over the next six months.

“We were never bearish,” said Melzi. “We had just thought that in a closer campaign, the market could be more sensitive” to the candidates’ proposals, he said.

Bank of America Corp. in April cut its real forecast for September to 1.9 because the election would curb investment. The bank now forecasts the real will end the year at 1.8. David Beker, head Latin America strategy at Bank of America in New York, was traveling and unavailable to comment, according to spokeswoman Susan McCabe.

Yields on Brazil’s interbank rate futures contract due in January held yesterday at 10.66 percent. The extra yield investors demand to own Brazilian dollar bonds instead of U.S. Treasuries rose four basis points to 209, according to JPMorgan Chase & Co. indexes.

2006 Election

The one-month realized volatility on the real, which measures the average price fluctuation over the past month, fell to 7 percent on Sept. 10, the lowest level since Bloomberg began tracking the data in 2007.

“You have two opposite forces — large inflows coming to Brazil and very heavy-handed dollar buying from the central bank,” said Nick Chamie, head of emerging-markets research at RBC Capital Markets in Toronto. “The central bank intervention eliminates any potential pickup in volatility” during the campaign, he said.

RBC forecasts the real will end the year at 1.8, according to data compiled by Bloomberg. In June, the bank forecast a year-end rate of 1.85.

The decline in real swings contrasts with a surge in the prior two elections. In May 2006, implied volatility reached 34 percent, the highest since Bloomberg started tracking the data in 2003, amid concern Lula would loosen inflation and spending limits after winning re-election.

The real tumbled 38 percent in the six months through September 2002 on concern Lula would default on the country’s debt. The currency rebounded 5.6 percent in the following three months as he signaled he would pay the debt.