Brazil's real set for biggest weekly rise in 2021 as data cements rate hike case

BRASILIA: Brazil's real on Thursday rallied 2% against the dollar, boosted by another round of central bank intervention in the swaps market and inflation data that analysts said sets the seal on an interest rate increase next week.

February's 5.2% annual inflation rate was higher than expected and well above the central bank's year-end target of 3.75%, cementing expectations it will raise its benchmark Selic lending rate by 50 basis points next week and adding fuel to the real's rally in recent days.

The lower house of Congress also approved the basic text of a bill reviving federal cash transfers to help millions of poor families affected by the COVID-19 pandemic, removing some of the fiscal uncertainty that has weighed heavily on Brazil's currency.

With global market sentiment also positive, the real jumped 2% to close at 5.54 per dollar. The currency is on course for its best week in more than three months.

"The market is pricing 50 basis points hike at the next meeting, followed by more hikes down the road," said Agustin Sicouly, head of Latin American currency trading at Barclays.

"It (higher rates) will give the currency some carry and yield," he said.

The central bank's $1 billion sale of foreign exchange swaps followed two separate interventions on Wednesday, one a $1 billion sale of FX swaps and the other a $405 million spot market sale.

The bank's FX swaps intervention this year now stands at $7 billion. It has also sold $5.58 billion in the FX spot market, all in the last few weeks.

Sergio Goldenstein, strategist at OHMResearch and a former central bank director, believes inflation and fiscal risks have forced the central bank into taking an active policy of pushing the dollar lower.

"The central bank has finally decided to 'break' those long of the dollar, pushing it lower," he tweeted late on Wednesday. "This puts long speculative or hedge dollar positions at risk, and attempts to avert or mitigate a negative spiral."