September 29, 2016 / 3:57 PM / 10 months ago

Brazil's central bank offers dollar liquidity after outflows

SAO PAULO, Sept 29 (Reuters) - Brazil's central bank has stepped up efforts to support foreign exchange liquidity as outflows frustrate investors who bet that the policies of the country's new government would trigger large inflows of foreign capital, traders said on Thursday.

The central bank announced late on Wednesday it will sell as much as $4 billion with repurchase agreements on Friday, more than the roughly $2.4 billion worth of so-called repo contracts expiring this month.

Though the central bank often uses that instrument to plug short-term gaps in the supply of foreign currency, it is the first time since March that it took steps to increase the amount of outstanding repos.

The move came hours after weekly central bank data showed net financial outflows of $4 billion last week, extending a four-month streak.

Many investors have been betting that the permanent ouster of leftist President Dilma Rousseff last month would trigger inflows as foreign investors were lured back to Brazil by the new government's more business-friendly approach and its pledges of fiscal responsibility.

"Last week's numbers caught investors by surprise and the central bank felt the need to soothe the market," said Roberto Campos, who helps manage 1.1 billion reais ($341 million) in assets as a partner at São Paulo-based Absolute Investimentos.

He added that last week's outflows likely reflected portfolio adjustments involving a move from spot-market instruments to derivatives, rather than a flight from Brazilian markets.

"If someone took that much money away, the real would have slumped," he said.

Brazil's currency has strengthened over 20 percent this year despite persistent outflows, ranking among the world's best-performing currencies, as traders in futures markets bet that Brazilian President Michel Temer's policies would lead to a surge in foreign investment.

Impatience

Three-month local dollar rates fell to their lowest level in over a month following the central bank announcement, suggesting expectations of plentiful foreign currency. That meant the central bank had curtailed some market concerns, according to a trader who deals directly with the central bank.

But the trader said many in the market are getting impatient waiting for inflows and next month could be a turning point.

October marks the last month of a program granting amnesty to Brazilians who bring undeclared foreign assets into the country.

"The clock is ticking and the market can only hang on for so long," said Tarcísio Rodrigues, head of currency trading at Banco Paulista.

$1 = 3.23 Brazilian reais Reporting by Bruno Federowski; Editing by Paul Simao

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