Brazilian Real ETF Strengthens As Central Bank Fights Inflation

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 |  Includes: BZF, EWZ
by: Tom Lydon

In an attempt to control inflation in its growing economy, Brazil's central bank has intervened in the currency market, strengthening the Brazilian real and related currency exchange traded fund.

WisdomTree Dreyfus Brazilian Real Fund (NYSEARCA:BZF) gained 1.4% Wednesday, but is in the red for the year on a weak Brazilian currency relative to the U.S. dollar.

The real rose to 2.0557, a six-week high, after the central bank sold $1.8 billion in currency swaps and agreed to lend as much as $2 billion in foreign-exchange credit lines, Bloomberg reports.

"The central bank aims to keep the real trading at around 2.05 in 2013," Joao Paulo Correa, manager of foreign-exchange trading at Correparti Corretora, said in the Bloomberg article. "The swap auctions clearly show that its goal is to avoid raising the Selic rate in 2013."

Swap rates dipped on speculation that the government will boost lending rates, or the "Selic," as a way to cap consumer prices. The credit lines increase the supply of U.S. currency as Brazilian companies push the greenback abroad to balance year-end bookkeeping.

According to economists, Brazil's IPCA index of consumer prices will hit 5.47% in 2013, compared to the projected rise of 5.42% a week earlier. The central bank has a 4.5% midpoint target range for 27 months.

The strengthening real has also boosted the iShares MSCI Brazil Index Fund (NYSEARCA:EWZ), which does not hedge against currency risks. EWZ is up 5.9% over the past month. Moreover, rising oil prices are also supporting the Brazil ETF's outlook.

WisdomTree Dreyfus Brazilian Real Fund

(click image to enlarge)Click to enlarge

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.