Brazil's Real Falls as Global Stocks Drop, Carry Trades Unwind

By Jamie McGee

Oct. 24 (Bloomberg) -- Brazil's real fell as global equities declined and investors pulled money from emerging markets on concern economic growth is slowing.

The currency dropped 2 percent to 2.3075 per U.S. dollar at 3:36 p.m., from 2.2608 yesterday. The decline pares almost in half yesterday's 5.2 percent gain after the central bank announced plans to offer $50 billion in currency swaps. The currency has weakened 8.2 percent this week.

The decline was prompted by ``risk aversion and unwinding of trades as we approach the year end,'' said Francisco Diez director of emerging-market trading at RBC Capital Markets in New York. ``It's an extremely sensitive market to any news headlines and any new movement in the equities market.''

The real has fallen 17.5 percent this month against the dollar and is trading weaker against 13 of the 16 most-actively traded currencies. In the first eight months of the year, the real had appreciated the most of these 16 currencies.

The Standard & Poor's 500 Index declined 1.6 percent, while Brazil's Bovespa stock index fell 5.9 percent.

The central bank bought reais today at a rate of 2.3 per dollar to stem losses. The bank also said it sold 50,360 out of 70,000 currency swap contracts offered at two auctions today. In the contracts, the bank sells the U.S. currency in the futures market, allowing investors to hedge against a weaker real.

Brazil eliminated its financial tax on foreign investments yesterday to further support the currency.

`Long Way to Go'

``All the central bankers have a long way to go before investors return not only to Brazil, but to other countries as well,'' said Bartosz Pawlowski, a strategist at Toronto Dominion Bank in London. He estimated that the real could strengthen to 2 by the end of 2009. ``Once the global situation calms down, the underlying strengths of Brazil's economy will lure at least some international investors.''

The bank's interventions this week could ``at least temporarily placate'' Brazil's foreign exchange market, Alvise Marino, an emerging-markets analyst at IDEAglobal in New York, wrote in a note after markets closed yesterday.

The cash injection will ``channel higher inflation expectations, which could exert downward pressure on the real if the Banco Central do Brasil finds itself in a few months from now in the position to not be able to hike rates due to still tight lending conditions,'' Marino wrote.

The central bank raised its interest rate in September to 13.75 percent from 13 percent and is scheduled to hold its next policy meeting on Oct. 28-29. The central bank will leave its rate unchanged at the meeting, according to the median estimate of 25 analysts in a Bloomberg survey.

Argentina

Expectations the International Monetary Fund will lend money to developing nations tempered losses in the real, Diez said.

``It hasn't weakened as much as you think it would have, given where equities are trading today,'' he said.

The IMF is considering loans of up to five times the quota contributions of member nations, in an unprecedented effort to avert an economic collapse in emerging markets.

The Washington-based lender is discussing plans to offer so- called hard currency loans of three-to-six months that wouldn't carry usual fund demands for policy changes, two IMF officials informed of the matter said.

In Argentina, one of Brazil's biggest trading partners, the government has proposed a plan to take control of pension funds, an announcement that has stirred concerns of its ability repay debt.

``Obviously the Argentina situation weighs on the region,'' Pawlowski said. ``The probability of any contagion is very low.''

The yield on Brazil's overnight futures contract for January 2009 delivery rose 115 basis points, or 1.15 percentage points, to 16.9 percent. The yield on the government's zero-coupon bonds due in January 2010 rose 2 basis points to 15.81 percent, according to Banco Votorantim.

To contact the reporter on this story: Jamie McGee in New York at jmcgee8@bloomberg.net