UPDATE 2-Brazil central bank to slow pace of forex intervention

Walter Brandimarte
Wednesday, 18 Dec 2013 | 8:43 PM ET

* Central bank to offer $200 mln worth of currency swaps per day

* Dollar sales through repos will hinge on market liquidity

* Additional dollar sales may happen if needed

(Adds background, comment from finance minister)

SAO PAULO, Dec 18 (Reuters) - Brazil's central bank announced on Wednesday a likely slowdown in the pace of currency intervention next year, a move that appears aimed at taking advantage of an upbeat market reaction to U.S. policymakers' decision to cut back on monetary stimulus.

The central bank said in a statement that it will extend its currency intervention program with some adjustments through at least the end of the first half of 2014.

The program extension will provide investors with some $20 billion worth of currency swaps, derivatives that offer protection against a possible depreciation of the real. That compares to about $60 billion in swaps offered in the first leg of the program, which went into effect at the end of August.

The adjustment in the pace of intervention was announced after markets reacted positively to the Fed's decision to cut its $85 billion-a-month bond-buying program by an initial $10 billion as of next year.

Even as the decision could reduce the supply of dollars seeking higher returns in emerging markets, investors were encouraged by the Fed's suggestion that U.S. interest rates may remain near zero for longer than expected.

Finance Minister Guido Mantega, who earlier on Friday had called on U.S. policymakers to start cutting the stimulus sooner rather than later, said the first indications were that Brazilian markets were reacting well to the Fed's decision.

"That means we'll have less turbulence in the forex market. It means the dollar will strengthen less (against the real) than some maybe expected," he said in an interview with Globo TV.


Including previous interventions in the forex market this year, the stock of currency swaps offered by Brazil's central bank is expected to reach $100 billion at the end of 2013 and $120 billion by the end of June 2014, or about one-third of the country's international reserves of $375 billion.

As of next year, the bank will offer $200 million a day worth of traditional currency swaps, or $1 billion per week through its regular intervention program. That is half the $2 billion it currently offers every week in auctions held from Mondays through Thursdays.

Dollar sales on the spot market through repurchase agreements will "depend on liquidity conditions in the foreign exchange market," the central bank added in the statement.

Currently, policymakers offer as much as $1 billion worth of dollar repos on Fridays, but government sources have told Reuters that demand for such dollar lines has not been very strong.

The central bank said, however, that it may still sell dollars through "all instruments available" whenever it deems it necessary, leaving the door open for more aggressive currency intervention.

Brazil's intervention program was announced when the country's currency traded around 2.45 per dollar in late August, adding to inflation pressures. It has greatly contributed to stabilizing the real around the current level of 2.3 per dollar.

(Additional reporting by Brad Haynes; Editing by Todd Benson, Andrew Hay and Ken Wills)