Brazil's real led losses among its most-traded peers as the central bank intervened to weaken the currency in a bid to slow this year's rally and support exporters.
The real dropped 1.6 percent to 3.4913 per dollar at 2:03 p.m. in Sao Paulo, making it the world's worst-performing currency after Libya's dinar. The loss came after the monetary authority sold 40,000 reverse swaps Monday, a move that's equivalent to buying US$2 billion in the futures market.
Brazil's real is still up 14 percent this year, heading for its best annual gain since 2009, on speculation that a new government will be able to restore growth and curb a record budget deficit. Beginning in March, policy makers started selling reverse swaps in a bid to keep it from appreciating so much that it impairs the competitiveness of Brazil's exports.
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"The intervention is the main driver of the currency today, with the central bank working to reduce volatility and holding the currency at a reasonably good level for external accounts," said Italo Abucater, the head of currency trading at ICAP Brasil Ctvm in Sao Paulo. "Still, politics is the driver for the longer-term move."
Franklin Templeton said it is increasing its investments in Brazil, betting the expected ouster of President Dilma Rousseff this month will boost the country's assets. The impact of Rousseff's potential removal isn't yet fully priced into Brazilian stocks, Mark Mobius, executive chairman of the fund manager's emerging-markets group, said in a television interview with Bloomberg Markets Middle East. The real is his favorite currency in developing nations, he said.
Vice President Michel Temer—Rousseff's successor should she be removed—intends to get investor-friendly measures approved quickly in Congress, paving the way for rate cuts, according to a report in O Estado de S. Paulo.
Brazil raised the taxation on foreign exchange purchase in cash to 1.1 percent from 0.38 percent, according to a decree published on Monday in the official gazette. The measure is expected to generate additional revenue of $686 million per year, Fernando Mombelli, a revenue service official, told reporters in Brasilia.
One-month implied volatility rose 0.8 percentage point to 18.12 percent, the highest among 16 major currencies tracked by Bloomberg. The cost of insuring Brazilian bonds in the credit-default swaps market for five years dropped 3.5 basis points, reaching 333.5 basis points.
Swap rates on the contract maturing in January 2017, a gauge of expectations for interest rates, rose 0.065 percentage point to 13.665 percent.
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