Real Strengthens As the Central Bank of Brazil Conducts Sales of Currency Swaps

The major currency of Brazil, Real has experienced the biggest rally among all the major currencies today, thanks to the intervention of the Central Bank of the biggest economy in the Latin American region. Real has actually advanced to its highest value in the last 6 weeks as the Central Bank sold currency swaps worth $1.8 billion. The sale was completed through two separate auctions. The Central Bank has also decided to lend as much as $2 billion in the lines of foreign-exchange credit. The swap rates of Brazil experienced a decline as there were speculations that the policy makers of the country will increase the target lending rate (Also, known as the Selic), in an attempt to cap the consumer prices.

The real has seen a surge of 1.2% and is currently at 2.0557 per USD marking its strongest value since 12th November. On the other hand, the swap rates which are due in January, 2014, experienced a decline of 3 basis points and are at 7.14% currently.

According to the Manager of Correparti Corretora’s Foreign-Exchange Trading Department, Joao Paulo Correa, the Central Bank is trying to keep the real trading around the 2.05 level throughout the next year. Paulo added that the swap auctions clearly demonstrate that the Central Bank is trying to avoid any instance of increasing the Selic rate in 2013.

On the first swap auction, 27500 out of the 40000 currency swaps were sold. On the 2nd auction, 9500 out of the 40000 were sold. The target lending rate was kept at 7.25% on November after reducing the same for 10 straight months in an attempt to support the economy.

Based on initial forecasts, the IPCA index of consumer prices is all set to increase to 5.47% in 2013. The same was projected at 5.42% only a week before. For this year, the consumer prices have increased by 5.53% on November, if compared to the prices of last year. The annual inflation of 2012 has already exceeded the 4.5% midpoint, the target range for Central Bank of last 27 months. It will now be tricky to see that how the policy makers balance the real price by making currency swaps and reverse currency swaps, as anything beyond the 2.1 per USD level will cause trouble for the exporters.