(Bloomberg) -- Brazil’s extraordinary efforts to shore up its currency weren’t enough to stem a rout that left the real at the weakest level since former President Dilma Rousseff’s impeachment in 2016.
Policy makers offered to sell an additional $1.5 billion of swaps contracts Tuesday, beyond the $750 million they had been auctioning daily, after the currency fell to a two-year low. While the real initially pared losses, the recovery faded by late afternoon. It was down 1.8 percent to 3.8132 per dollar as of 4:19 p.m. in New York.
“Any central bank that tries to intervene in their FX market is only inviting speculators to test the bank’s will,” said James Gulbrandsen, a Rio de Janeiro-based money manager who helps oversee $3.5 billion of assets at NHC Capital. “For the bank, it typically ends in feeling like you’re drinking water from a fire hose.”
The real has weakened 13 percent since the end of March, the worst performance among major currencies, as investors grow concerned that October elections could usher in a new president less attuned to investors and business. Fear that fixes to fiscal problems would be derailed have exacerbated what’s already been a lackluster year in emerging markets.
Still, Gulbrandsen said the real is beginning to look attractive at current levels, and if it were to weaken to 4 per dollar he’d “load the boat” buying the currency.
The central bank sold about 22,000 of the 30,000 contracts if offered at two extra auctions. It placed all 15,000 contracts in the day’s regularly scheduled sale. The amount that remained unsold isn’t enough to worry traders and will likely be added to tomorrow’s daily auction, according to Hideaki Iha, a trader at Fair Corretora, who said policy makers weren’t willing to give the investors as high a rate as they were pushing for.
While the swaps don’t change the supply of physical dollars in Brazil, they support the real by meeting demand from investors who want to hedge against the risk of the decline in the Brazilian currency. They also boost onshore dollar loan rates, encouraging commercial banks to bring greenbacks into Brazil to profit from the higher rates onshore.
“The central bank got the timing right, coming in to try to curb a speculative move,” said Italo Abucater, the head of foreign-exchange trading at Tullett Prebon brokerage.