The Brazilian real on Friday posted its largest single-day gain in nearly three months after the central bank acted to halt losses that had taken the currency beyond the limits of an informal trading band. The Mexican peso also posted gains, buoyed by hopes that Greece's lenders were nearing an agreement to release funds to Athens, but the Chilean peso dropped after hitting a one-month high in the previous session.
Brazil's intervention in the currency market came as the real quickly slid on 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 0.8 percent to 2.0812 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 auctioned in an attempt to cancel some reverse currency swaps - which mimic the purchase of dollars - expiring in the beginning of December. "The central bank announced the swap auction almost at the same time as Mantega said the exchange rate isn't totally satisfactory," said Alvaro Bandeira, chief economist with Orama in Rio de Janeiro. "The market is chaotic but so is the government."
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.
"Today's (early) losses in the real were out of control and did not reflect the fundamentals," said Jankiel Santos, chief economist at BES Investimento in Sao Paulo. "The central bank wants to avoid market excess." The real had been trading weaker than 2.1 per dollar since the beginning of the session 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 favourable to Brazilian exporters and not too bad for inflation. But signs that the government would favour 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. Mantega, who coined the expression "currency war" in 2010 to complain about the strength of emerging market currencies, indicated that the real is approaching the levels desired by the government, although he made clear the currency still has some room to weaken.