Real Rises as S&P Brazil Affirmation Overshadows Currency Stance

Real Rises as S&P Brazil Affirmation Overshadows Currency Stance

By Paula Sambo

10:19 AM BRT
March 24, 2015

(Bloomberg) — Brazil’s real climbed for a third straight day as Standard & Poor’s affirmation of the nation’s investment-grade credit rating overshadowed speculation that the central bank will phase out sales of swaps supporting the currency.

The real rose 0.3 percent to 3.1238 per dollar at 3:08 p.m. in Sao Paulo after earlier falling 1.2 percent following the top central banker’s comments on foreign-exchange intervention. The currency slid last week to a 12-year low.

S&P maintained Brazil on Monday at one step above junk with a stable outlook, citing President Dilma Rousseff’s “marked adjustment in various policies” to restore credibility. While the rating company expects Latin America’s largest economy to contract 1 percent this year, it expects 2 percent growth in 2016.

“S&P’s action is a relief for investors, a vote of confidence for the presidency,” Reginaldo Siaca, a currency manager at Tov Corretora de Cambio in Sao Paulo, said in a telephone interview.

During an extremely challenging year, S&P assumes that Rousseff will sustain the shift in policy, Lisa Schineller, a sovereign analyst for Latin America at the rating company, said on a conference call Tuesday.

Rousseff “has tasked her economic team with engineering a marked adjustment in various policies, not only fiscal, to restore lost credibility and strengthen Brazil’s now weaker fiscal and economic profiles to continue implementing fiscal measures to shrink a record budget deficit and restore investor confidence,” S&P wrote in a report Monday.

S&P Rating

S&P cut the nation in March 2014 to BBB-, the lowest level of investment grade. Moody’s Investors Service, which rates Brazil one step higher, cited a stalled economy and fiscal challenges when it put the nation on negative outlook six months later.

The real fell earlier Tuesday as central bank President Alexandre Tombini told lawmakers that the sale of swaps supporting the currency has fulfilled policy makers’ objectives, while adding that extending the maturities of existing hedges is appropriate in the short and medium term. Under the intervention, the Brazil cut in half daily swap offerings in 2015 compared with last year.

“The daily sale of swaps might end,” Joao Paulo de Gracia Correa, the head of currency trading in Curitiba, Brazil, at Correparti Corretora de Cambio, said by telephone.

The swaps program has played an important role in promoting financial and economic stability as well as reducing currency volatility, Tombini said.

To support the real and limit import price increases, the central bank sold the equivalent of $98.2 million of currency swaps as part of a plan to offer as much as $100 million a day until at least March 31. It rolled over contracts worth $352.9 million.

Swap rates on the contract maturing in January 2016, a gauge of expectations for changes in borrowing costs, dropped 0.02 percentage point to 13.58 percent.

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