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EMERGING MARKETS-Brazil real seesaws in Mantega, Tombini tug of war

by on November 23, 2012 4:05 pm GMT
 

Fri Nov 23, 2012 11:05am EST

* Real weakens to 2.11/dlr as Mantega says FX rate
‘reasonable’

* Central bank calls swap auction, props real back to
2.09/dlr

* Markets wonder whether new informal band ceiling at 2.12

By Walter Brandimarte and Natalia Cacioli

RIO DE JANEIRO, Nov 23 (Reuters) – The Brazilian real
temporarily weakened past the level of 2.1 per dollar on Friday,
widely seen as the limit of an informal trading band, but erased
all of its losses later as the central bank intervened in the
market.

The central bank action came as the real quickly added to
losses following comments by Finance Minister Guido Mantega, who
told a crowd of business leaders in Sao Paulo that the exchange
rate is at a “reasonable though not totally satisfactory level”
to support industry.

The apparent tug of war between Mantega and the central bank
left investors wondering whether policymakers still uphold an
informal trading band of 2.0-2.1 per dollar where the real has
been stuck since early July.

“The government is worried about industry, as we can tell by
comments from several officials, but then comes the central bank
worried about inflation and you have this tug of war,” said a
trader with a Brazilian bank.

“We can’t say, however, that the central bank is defending
the level of 2.1 per dollar. It only intervened today because
the real was weakening too sharply,” he added.

The real gained 0.5 percent to 2.0861 per
dollar after the central bank sold about half of the 62,800
traditional swaps it offered in an auction.

Those contracts, which emulate the sale of dollars in the
futures market, were apparently sold in an attempt to cancel
some reverse currency swaps — which mimic the purchase of
dollars — that expire in the beginning of December.

The central bank announced the intervention shortly after
the real slid more than 0.8 percent to an intraday low of 2.1168
per dollar — its weakest in 3-1/2 years.

Hinting that some type of intervention was possible, central
bank chief Alexandre Tombini had already said on Thursday that
the bank was ready to provide liquidity to the foreign exchange
market at year-end, when dollars are traditionally more scarce
in Brazil.

NEW TRADING RANGE?

The real had been trading weaker than 2.1 per dollar since
the beginning of the session, however, as small dollar outflows
weighed on a market with thin trading volumes after the
Thanksgiving holiday in the United States.

The 2.0-2.1 reais per dollar range, informally imposed by
policymakers through a series of market interventions in the
past several months, was considered at the same time favorable
to Brazilian exporters and not too bad for inflation.

But signs that the government could tolerate a weaker
currency to prop up the economy started to emerge early this
week, when President Dilma Rousseff said in an interview that
the government is “looking for an exchange rate that is not this
one, with a devalued dollar and an over-valued real.”

A weaker real could help Brazil’s manufacturers, which have
struggled with an over-valued currency and high input costs. The
real has lost 10 percent this year, but remains more than 20
percent stronger than it was at the end of 2008.