Brazil Real Plunges to 8 Week Low on Rate Outlook Commodities

Brazil’s real sank to an eight-week low as falling commodity exports and mounting speculation the central bank will cut interest rates sparked capital flight.

“We just don’t know how deep the problem is and the bad news just keeps on coming,” said Marcos Forgione, a trader at B&T Corretora de Cambio in Sao Paulo.

The real fell 3.6 percent to 2.4975 per dollar at 3:21 p.m. New York time, after earlier touching 2.5115, the weakest since Oct. 8. It has tumbled 7.7 percent this week, the biggest decliner in the world after the Zimbabwean dollar, and 38 percent from a nine-year high reached on Aug. 1.

The central bank bought reais in the currency market at two auctions today and lent $1.96 billion to exporters in a separate offer in a bid to stem declines. Investors want the central bank to take more aggressive action, including offering more foreign- exchange swap contracts, said Roberto Simoes, a fixed income trader at BES Investimento in Sao Paulo.

“The actions haven’t been very effective in reducing volatility, and people are getting worried about the absence of swap offers,” Simoes said.

The central bank hasn’t offered currency swaps since Nov. 28.

Speculation the central bank may cut interest rates as soon as next week to shore up growth in Latin America’s biggest economy also curbed demand for reais. Central bankers may reduce Brazil’s 13.75 percent target lending rate by as much as 0.5 percentage point at its Dec. 10 meeting, Forgione said. That would be the first reduction since September 2007.

Commodities Plunge

The speculation is pushing yields lower on local currency bonds and interest-rate futures contracts.

The yield on the zero-coupon note due in January 2010 fell 15 basis points, or 0.15 percentage point, to 13.89 percent, according to Bloomberg prices. The yield has fallen 74 basis points this week. The yield on the nation’s overnight futures contract for January 2009 delivery dropped 3 basis points today to 13.54 percent, leaving it 21 basis points below the central bank’s overnight rate.

Commodities, which account for about two-thirds of Brazil’s exports, have declined 50 percent from a record high on July 2, according to the UBS Bloomberg CMCI index of 26 raw materials.

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Brazil Real Plunges to 8 Week Low on Rate Outlook Commodities