The Brazilian real rallied, strengthening beyond two real per US dollar for the first time since July last year, after the Central Bank of Brazil auctioned foreign exchange swap contracts to shore up the currency and contain inflation.
The real rallied 1.7 percent to 1.9955 per US dollar at the close on Monday in Sao Paulo, reversing an initial loss after the central bank sold all US$1.85 billion of contracts offered. The gain was the biggest since June 29 last year, pushing the currency to its strongest level since July 2.
The intervention surprised traders, who had speculated that the central bank would refrain from rolling over US$1.8 billion of currency swap contracts maturing on Friday, said Joao Paulo de Gracia Correa, the head of currency trading at Correparti Corretora in Curitiba, Brazil.
“The auction took everybody by surprise,” he said in a telephone interview. “The central bank should leave the real at this level in the short term to relieve inflation pressure.”
Policymakers last year swung between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by keeping the real from strengthening beyond two per US dollar.
The central bank sold all of the 37,000 of currency swap contracts it offered on Monday.
Most swap rates on contracts expiring after October 2015 climbed, as analysts raised their inflation estimates for this year for a fourth week, increasing pressure on policymakers to lift borrowing costs.
Consumer prices will rise at an annual rate of 5.67 percent this year, according to the median estimate of about 100 analysts in a survey conducted by the central bank and published on Monday. That compares with a projection of 5.65 percent made the previous week.
The best policy for containing consumer price increases is to keep the target rate at a record low for a “sufficiently prolonged period,” the central bank reiterated in minutes of its meeting on Jan. 15 and Jan. 16 published last week.
Annual inflation has exceeded the 4.5 percent midpoint of the central bank’s target range for 28 consecutive months.
The Extended National Consumer Price Index prices 5.84 percent last month from a year earlier after increasing 5.53 percent in the previous period, the Brazilian Institute of Geography and Statistics said on Jan. 10.
The central bank estimates that economic growth slowed to 1 percent last year, following an expansion of 2.7 percent in 2011 and 7.5 percent in 2010.
Swap rates on the contracts due in January 2017 rose five basis points, or 0.05 percentage points, to 8.81 percent, the highest level on a closing basis since Nov. 22 last year.