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Petroleo Brasileiro Petrobras SA : Brazil's Real Opens Stronger Ahead of Central Bank Meeting

03/06/2013 | 07:50am US/Eastern
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--Brazil's Central Bank meets to discuss interest rates, decision after markets close

--Latin America's largest economy remains sluggish, but price pressures on upswing

--Brazilian real opens at BRL1.9619, stronger from Tuesday's close at BRL1.9637

 
   By Jeff Fick 
 

RIO DE JANEIRO--The Brazilian real opened stronger against the U.S. dollar Wednesday as a global rally reached the country's shores, but investors were also anticipating central-bank policy meetings at home and abroad.

The local currency shrugged off slight declines in the euro, seen as a barometer for the local currency, as the single currency was caught up in caution ahead of a meeting by the European Central Bank. The real opened trading at BRL1.9619 to the U.S. dollar, stronger from Tuesday's closing price fix at BRL1.9637, according to Tullett Prebon via FactSet.

Strong stock-market gains in the U.S., with the Dow Jones Industrial Average index reaching a fresh record high, spurred gains in equity markets around the world. Stock markets in Asia reached levels not seen since 2008, while European markets also opened in the black. But currency market players around the world were expected to play it close to the vest as the Brazilian Central Bank joined counterparts in Europe, Canada, the U.K. and Japan in holding policy meetings over the next two days.

While Brazil's Central Bank is expected to hold interest rates at a record-low 7.25%, the mood was expected to remain cautious in light of possible changes to the bank's accompanying policy statement, traders said. Previous policy statements have noted that interest rates would be held at current lows for a "sufficiently prolonged period." Should that language be dropped, it would be considered an indication that central bankers have opened the door to higher interest rates.

The government would like to see the central bank keep interest rates low to spark economic growth, but rising inflationary pressures have forced Central Bank President Alexandre Tombini and Finance Minister Guido Mantega to reaffirm the bank's commitment to containing prices. Brazil's economy expanded 0.9% in 2012, the country's worst annual performance since the financial crisis. That was down from 2.7% growth in 2011.

But inflation remains persistent despite the sluggish growth, rising to 6.2% in mid-February after ending 2012 at 5.84%. Central Bank officials insist that price pressures will retreat in the second half of 2013 on the strength of a robust grain and oilseeds harvest, as well as government-ordered cuts in electricity rates.

While some recent inflation measures have showed signs that the pace of price increases is easing, the decision late Tuesday by state-run energy giant Petroleo Brasileiro SA (PBR, PETR4.BR), or Petrobras, to raise domestic diesel prices by 5% will add upward pressure to the inflation mix.

The central bank has kept the real trading between BRL1.95 and BRL2.00 so far in 2013, a level seen as beneficial for local manufacturers and exporters without stoking inflation.

The market will take further direction later in the day as a slew of important economic data is released overseas, traders said. The U.S. Federal Reserve will release its "beige book," a snapshot of the world's largest economy known by the color of its cover. In addition, widely watched payroll figures for February will be released.

Write to Jeff Fick at Jeff.Fick@dowjones.com

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