A two-month rally in the Brazilian real is spurring speculation the central bank will buy dollars in the futures market for the first time in 14 months.

Central bank officials called currency traders on July 23 to gauge their demand for so-called reverse currency swaps, which allow policy makers to sell the real for dollars in the futures market, according to BNP Paribas, Nomura Securities International Inc. and CM Capital Markets.

The 5.9 percent appreciation of the real in the past two months, the most since October, is driving central bank President Henrique Meirelles to increase efforts to stem the gains and protect exports after the trade surplus shrank to the smallest in seven years, according to BNP Paribas.

“The central bank has been intervening in the spot market very aggressively, but it wasn’t enough,” Flavia Cattan- Naslausky, a currency strategist with RBS Greenwich Capital Markets in Stamford, Connecticut, said in a telephone interview. “It’s not working. They may signal to the market they are prepared to do more. The market should be worried.”

A central bank official declined to comment yesterday.

The two-month gain trimmed the real’s decline this year to 1 percent. The currency soared 33 percent in 2009, prompting the government to impose taxes on foreigners’ purchases of bonds and stocks. It’s up 101 percent since President Luiz Inacio Lula da Silva took office in 2003, the biggest increase among major currencies tracked by Bloomberg. The real rose 0.6 percent yesterday to 1.7624 per dollar.

‘Psychological Effect’

In reverse currency swaps, the central bank pays investors the Brazilian overnight interbank rate, now at 10.75 percent, in reais and receives a fixed interest rate in dollars. The central bank last sold the contracts on May 5, 2009, helping spark a 1 percent slide in the real that day.

“It’s another channel for intervention,” said Luciano Rostagno, chief strategist at CM Capital Markets in Sao Paulo. “There’s also a psychological effect. It shows investors that they are looking for other options for intervention.”

Rostagno said the central bank is trying to prevent the real from surpassing 1.75 per dollar.

International investors trimmed their bets on the currency rising from a two-year high on July 23, making 129,143 more wagers on the real gaining than falling that day, down from 133,995 the previous day, the most since July 2008, data from the BMFBovespa SA exchange in Sao Paulo show.

Cupom Cambial

Speculation policy makers will start futures market sales pushed dollar loan rates in Brazil, known as Cupom Cambial, down the most in two years yesterday. Yields on the Cupom Cambial contracts due in January fell 26 basis points, or 0.26 percentage point, to 1.79 percent on concern central bank swap sales would increase currency hedging costs for investors depositing their dollars in Brazil. The gap between the yield and borrowing costs in the London interbank lending market narrowed to 109 basis points yesterday from a four-month high of 135 on July 23.

The extra yield investors demand to hold Brazilian government dollar bonds instead of U.S. Treasuries fell six basis points to 204 yesterday, according to JPMorgan Chase & Co.

The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps dropped four basis points to 116, the lowest level in three months, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Real Rates

Yields on Brazil’s interest-rate futures contract due in January fell five basis points to 10.89 percent, implying traders expect the central bank to raise the overnight rate, known as Selic, to about 11.25 percent by year-end.

Policy makers have boosted the Selic 200 basis points this year, giving the country the second-highest inflation-adjusted interest rate after Croatia among the 53 economies tracked by Bloomberg.

The central bank tripled daily dollar purchases in the spot market this year, buying $14.7 billion to stem the real’s rally, according to the bank’s website.

“They are trying to avoid pressure for more serious distortions,” said Diego Donadio, a senior Latin America analyst at BNP Paribas in Sao Paulo. Reverse currency swaps would create another “source of dollar buying,” he said. “In the short term, it’s going to curb the appreciation of the real.”

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