Brazilian Real Falls Most in Region on Central Bank Intervention

(Bloomberg) -- Brazil's real led regional declines as the central bank intervened to weaken the currency, offsetting a rise in commodity prices.

The real fell 1 percent to 3.2696 per dollar on Monday amid reduced trading due to the U.S. Independence Day holiday. Brazil's central bank placed all 10,000 reverse swaps contracts offered in an auction this morning, a move equivalent to buying $500 million in the futures market.

Other emerging market currencies gained as precious metals led commodities higher on speculation central banks in some of the world's leading economies will step up monetary stimulus in the wake of the U.K.'s decision to leave the European Union. The real has climbed the most among about 150 currencies worldwide this year, prompting the central bank to try to limit its appreciation by selling $43.3 billion in reverse swaps since March 21.

"Traders are speculating a window of opportunity was opened for the central bank to trim its swaps position, which should keep pressuring the real down," said Joao Paulo de Gracia Correa, the head of foreign currency at brokerage SLW in Curitiba, Brazil. "Still, there is a very positive environment for riskier assets worldwide, so I expect some volatility for the real."

Traders have pushed up the value of Brazilian assets this year on speculation that a new administration would pave the way for measures to revive the economy and curb a ballooning budget deficit. Regaining investors' trust is a key goal for Michel Temer, who assumed the presidency on May 12 after a Senate vote that forced Dilma Rousseff to temporarily step down while she faces an impeachment trial.

In Brazil, economists reduced their 2016 inflation forecast for the first time in seven weeks as they foresee a stronger currency this year and next. Consumer prices will rise 7.27 percent this year, down from the current level of 9.32 percent, according to a central bank survey for the week ending July 1. They also lowered their 2017 year-end inflation forecast for the first time since mid-May, to 5.43 percent. They see the real ending the year at 3.46 per U.S. dollar, from 3.6 the prior week. Analysts forecast Brazil's economy will contract 3.35 percent this year, versus a prior forecast for a 3.44 percent recession.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, dropped 0.04 percentage point to 12.68 percent.

--With assistance from Aline Oyamada To contact the reporter on this story: Paula Sambo in Sao Paulo at psambo@bloomberg.net. To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net, Jessica Brice