Playground in the Brazilian real are slowing down to a minimum of 27 months

Playground in the Brazilian real are slowing down to a minimum of 27 months as the dollar buying central bank and a tax on purchases of foreign bonds to offset the investment flows in Latin America's largest economy.

The implied volatility of options on a month for real against the dollar, reflecting traders' expectations of currency movements over the next month, sank to 9.95 percent last week, at least since September 2008 from 18.38 in May, according to data compiled by Bloomberg. similar options in the Polish zloty climbed to a four-month high of 19.8 percent on Nov. 30 before falling to 18 percent last week.

Brazil's Central Bank bought 2.35 billion U.S. dollars last month, Finance Minister Guido Mantega tripled a tax on foreign purchases of local debt to stop the appreciation of the real two-year, 43 percent rally . The country's interest rates adjusted for inflation, the highest in the world after Croatia, are attracting investors looking for alternatives to the relatively low yields in the U.S., Europe and Japan. Brazil will increase the key rate by 200 basis points next year to 12.75 percent, futures trading shows.

"There is a relatively consistent demand for foreign exposure by trying to push real dollar down, but at the same time, you have the central bank and the government trying to push up," Nick Chamie, global head of emerging markets at RBC Capital Markets in Toronto, said in a telephone interview. "These two opposing forces are pushing to reality in a narrow range."

The real fell 0.1 percent against the dollar in the last month at 1.7070, according to Bloomberg data.

"Currency War"

Mantega, who shall hold office under Dilma Rousseff, the elected president, he spearheaded the tax twice in October, after the real rose to 1.65 against the dollar, the strongest in more than two years. The currency is up 5.7 percent in the last six months. Brazil is ready to take new steps to prevent further increases in the real, Mantega said on 9 December, two months after telling reporters that countries are participating in a "currency war" to weaken their exchange rates and boost exports.

The Central Bank bought U.S. $ 7.6 billion in the foreign exchange market in October and $ 10.8 million in September to curb the appreciation of the real. It has bought dollars every day from May 8, 2009.

The central bank did not return messages seeking comment after business hours.

"If the market pushes him closer to the most recent peak of 1.65 or less, the risk of intervention will rise and then go from words to action," said Marjorie Hernandez, currency strategist at HSBC Holdings Plc in New York, in a telephone interview. "That's the level of sensitivity."

Spending

Rousseff concern can not curb the growth in spending to help ease inflation can fuel big swings in the real world, "said Enrique Alvarez, head of Latin America fixed income research at IDEAglobal in New York.

President Luiz Inacio Lula da Silva, spending increased 27 percent in the first nine months of the year.

Annual inflation up to November was 5.63 percent, the highest since February 2009. Brazil's inflation target of 4.5 percent, plus or minus two percentage points.

"That filter in the volatility of the currency," Alvarez said in a telephone interview.

The implied volatility of options on a month for real against the dollar increased by 10.99 percent on December 10.

The extra yield investors demand to own Brazilian dollar bonds instead of U.S. Treasuries fell 1 basis point to 167, according to the indices of JPMorgan Chase & Co..

Yield differential

The cost of protecting Brazil's bonds against default for five years rose 1 basis point to 111, according to CMA prices. Swaps credit-default pay the buyer face value in exchange for the underlying securities or the cash equivalent of a government or a company fail to adhere to its debt agreements.

Yields on Brazil's overnight rate for futures contracts in January 2012 fell 4 basis points to 11.94 per cent on 10 December.

Investors are pouring money into Brazil to take advantage of high-yielding assets in the country and the fastest economic expansion in more than two decades. 10 percent of Brazilian real-denominated bonds in 2021 yield by 12.33 percent, or 901 basis points more than similar maturity U.S. Treasuries, according to data compiled by Bloomberg.

Brazil's economy will expand 7.5 percent this year, the most since 1986, according to a central bank survey of analysts released on December 6. The U.S. economy, the world's largest, will grow by 2.8 percent, according to the median estimate of 77 analysts surveyed by Bloomberg.

Rate Futures

Traders in the futures market are betting interest rates Tombini Alexandre, who is awaiting Senate confirmation to become the next president of the central bank will increase borrowing costs benchmark by 50 basis points in its first January meeting. At the last meeting President Henrique Meirelles on 8 December, the board kept the rate at 10.75 percent.

U.S. future interest rates has a 12 percent chance the Fed will raise its rate to 0.5 percent in January from zero to 0.25 percent.

"Global investors are willing to invest in Brazil because the rates are high," said Roberto Melzi, a strategist for Latin America, local markets at Barclays Plc in New York, in a telephone interview. "The fundamentals are better than the U.S. and Europe. On the other hand, you have this government ready to fight against the flow. That is why we do not see much more volatility in the medium term. You have the forces in conflict. "