November 11, 2016 / 2:32 PM / 2 years ago

UPDATE 3-Brazil real extends Trump-driven slump despite intervention

(Updates to close)

By Bruno Federowski

SAO PAULO, Nov 11 (Reuters) - The Brazilian real posted its worst three-day loss since 2008 on Friday even after the central bank stepped up currency interventions amid lingering concerns over the win of U.S. President-elect Donald Trump.

The real weakened nearly 7 percent since Trump was elected on Tuesday. The currency closed at its weakest since June, just shy of 1 percent lower on Friday at 3.3912 to the dollar.

Trump’s pledges of tax cuts and heavy public spending also fostered concerns that U.S. rates could rise more than expected in the coming months, draining capital away from high-yielding emerging markets.

Yields on U.S. 30-year Treasury bonds rose 38 basis points on the week for its biggest weekly increase since January 2009, boosted by higher inflation expectations.

Traders also fear a global trade shock if he makes good on promises to review U.S. trade accords.

The sharp currency move put Brazil’s central bank on alert, driving it to suspend its daily auctions of reverse currency swaps, which function like dollar purchases by investors for future delivery.

Early on Friday, the central bank sold new traditional swaps in order to roll over the $6.5 billion contracts maturing next month, the first time it has done this since April. Investors often purchase currency swaps in order to hedge against the possibility of a weaker real.

Then in the afternoon, the bank offered two fresh lots of traditional swaps, not intended to roll over existing maturing positions, in an effort to counter volatility on the exchange market.

The bank had used those contracts to reduce the amount of costly traditional currency swaps, equivalent to future dollar sales, on its balance sheet to $24 billion from over $100 billion late last year.

“It shows that the current board is not dogmatic and has the ability to adapt to different market regimes,” BNP Paribas strategists said. “It goes in line with the goal of smoothing out FX variations and containing excessive volatility.”

The central bank sold all 15,000 swaps offered in the rollover auction, effectively injecting $750 million in additional market liquidity, leading the real to slightly pare losses to 3.41 per dollar.

Some traders said the prospect of higher U.S. rates could also make the central bank think twice before cutting rates sharply in the coming months.

Analysts at Itaú Unibanco now expect the bank to cut the benchmark Selic rate by 25 basis points in its November meeting from 50 basis points previously. Reuters calculations showed rate futures prices were consistent with a 25 basis point cut.

The real has strengthened 15 percent so far this year, among the world’s best-performing currencies, as traders bet President Michel Temer would manage to rein in spending and curb debt growth.

Concerns that Temer could face legal action over a donation from builder Andrade Gutierrez during the 2014 campaign of ousted President Dilma Rousseff, also weighed on the real. Temer was vice president under Rousseff.

Rousseff faces an investigation by an electoral court calling for the cancellation of her 2014 victory due to illegal campaign donations. Her lawyers argue that any decision by the court should also apply to Temer. (Editing by Jeffrey Benkoe and Lisa Shumaker)

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