Brazil real falls on rate cut bets, Mexico peso flat

SAO PAULO: The Brazilian real weakened as much as 1 percent on Tuesday on bets the central bank would signal its monetary easing cycle may be extended further and it will allow around $4.5 billion in swaps originally sold to support the currency to expire.

The Mexican and the Chilean peso were flat to stronger, however, on speculation Federal Reserve Chairman Ben Bernanke could give clear signs of a third round of monetary stimulus during a meeting of central bankers in Jackson Hole, Wyoming, on Friday.

With the exception of the real, Latin American currencies had a quiet session, with investors in a wait-and-see mode before the much-anticipated Jackson Hole meeting. Monetary stimulus from the Fed usually translates into additional dollar inflows to emerging market economies.

The Brazilian currency lost 0.7 percent, however, as some investors speculated the central bank could hint at additional monetary easing after an expected cut in its benchmark interest rate on Wednesday. Economists widely forecast the Selic rate to fall 50 basis points to a fresh all-time low of 7.5 percent on Wednesday, reducing the allure of real-denominated assets.

Also weighing on the real were bets the central bank would not roll over some $4.5 billion worth of currency swaps that expire on Monday -- effectively mopping up dollar liquidity in the futures market.

"The real could weaken further before Friday as investors wonder whether the central bank will roll over the currency swaps," said Sidnei Nehme, a director at NGO brokerage in Sao Paulo. "If it doesn't roll over the contracts, as expected, that will add pressure on the real to weaken."

Despite some further weakening, the real should remain within the narrow band of 2.0 and 2.1 units per dollar it has been trading since early June, analysts said.

Clear signs of additional monetary stimulus by the Federal Reserve could bring the currency back to the level of 2 per dollar, prompting the central bank to act the same way it did last week.

The central bank last Tuesday sold about $350 million of reverse currency swaps -- contracts that, unlike the traditional swaps it had been recently offering, have an impact similar to the purchase of dollars in the futures market. The real has been gradually weakening since that day.