Brazil Real Rises Amid Reverse Swaps Auction, Impeachment Wagers

Brazil’s real advanced advanced after the central bank placed only about one fourth of the reverse Swaps it offered in an auction, indicating traders are skeptical that policy makers will be able to stem the currency’s appreciation.

Monday’s sale marked the first time the central bank sought to sell contracts that weaken the currency since March 2013, and represented a turnaround from its policy of using swaps to help bolster the currency. Owning the securities would provide traders with a hedge against depreciation in the real.

Now investors are trying to interpret if the central bank is signaling that it won’t allow the currency to appreciate beyond a certain level, and whether it intends to completely unwind the program that provided support to the currency over the past two years. The shift comes as the growing push to oust President Dilma Rousseff helps make the real the best-performing currency in the world this year, sending it up 9.4 percent, after it plunged 33 percent in 2015 amid forecasts for the worst recession in a century and a growing fiscal deficit that cost the country its investment-grade credit rating.

"Investors will test the central bank until knowing what it actually intends to do, and understand it if is intended to tackle it either the exaggerated appreciation of the real or to purchase back outstanding contracts," said Italo Abucater, the head of currency trading at ICAP Brasil Ctvm in Sao Paulo.

The real gained 0.1 percent to 3.6193 per dollar, after falling as much as 0.7 percent earlier Monday. One-week historic Volatility was at 30.9 percent, the fourth-highest level for more than 70 currencies tracked worldwide.

The central bank said late Friday that it would auction as much as $1 billion of reverse foreign-exchange swaps. It sold 5,500 of the 20,000 contracts it offered on Monday.

An opinion survey published by the Datafolha polling firm on Saturday showed that support for impeaching Rousseff rose to 68 percent, up from 60 percent in February. The Brazilian bar association, which was influential in the country’s return to democracy in 1985 and the impeachment of President Fernando Collor in 1992, on Friday voted to back a proposal by lawmakers to remove Rousseff from office.

Some investors and traders believe a new government is Brazil’s best hope for emerging from its recession and shoring up its fiscal accounts. The currency has extended gains this month after Rousseff’s decision to name former President Luiz Inacio Lula da Silva to her cabinet galvanized opposition. The move was seen as an attempt to shield her predecessor from prosecution in Brazil’s biggest-ever corruption probe.

"The pieces of the puzzle are now moving," said Leonardo Monoli, a partner at Jive Asset Gestao de Recursos in Sao Paulo. "And that tends to be reflected in rises and drops in the price" of the currency.

Swap rates on the contract maturing in January 2017, a gauge of expectations for Brazil’s interest rates, rose 0.02 percentage point to 13.78 percent.

--With assistance from Marisa Castellani To contact the reporters on this story: Paula Sambo in Sao Paulo at psambo@bloomberg.net, Filipe Pacheco in Sao Paulo at fpacheco4@bloomberg.net. To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net, Rita Nazareth

By: Paula Sambo and Filipe Pacheco

©2016 Bloomberg News