Brazil Rate Futures Yields Increase on Jobs Report; Real Rises

Yields on Brazilian interest-rate futures rose after a report showed unemployment unexpectedly fell in April, fueling speculation the central bank will slow the pace of cuts in borrowing costs.

“Worker income will stay at high levels and could keep pressure on prices of services, limiting the expected fall in inflation,” Newton Rosa, the chief economist at SulAmerica Investimentos, said by phone from Sao Paulo.

The central bank sold swap contracts at an auction to support the real. Brazil’s currency rallied the most in seven months yesterday and Mexico’s peso pared losses after policy makers in both countries propped up their currencies as European debt turmoil prompted a selloff in emerging-market assets.

The yield on the Brazilian interest-rate futures contract due in January 2014 rose 28 basis points, or 0.28 percentage point, to 8.62 percent at the close in Sao Paulo after touching a record low 8.05 percent on May 18. The real gained 0.2 percent to 2.0292 per dollar after earlier declining 1 percent.

The central bank auctioned 11,300 out of the 40,000 currency swap contracts it offered today, according to a statement. The currency touched 2.1062 yesterday, the weakest level since May 2009, before rallying 2.9 percent, the most since October.

Policy makers are concerned with excess volatility, not any particular exchange rate, because the real suffers from an “aversion to risk,” Carlos Hamilton, the Brazilian central bank’s director of economic policy, said yesterday.

Swap Auctions

The bank’s swap auctions, aimed at bolstering the real, are a reversal from last month’s policy of stepped-up dollar purchases aimed at weakening the currency to help exporters. Policy makers bought $7.2 billion in the spot market in April, the most since $8.4 billion in March 2011.

“The market keeps testing the central bank, and that’s a dangerous game because the bank has many instruments it can use,” said Vladimir Caramaschi, chief strategist at Credit Agricole (ACA) Brasil SA, in a phone interview from Sao Paulo. “The bank has space to place more swaps. It has the whole apparatus of measures that can be pulled out if necessary, and it’s sitting on a mountain of reserves.”

Interest-rate futures yields rose as the national statistics agency said today in a report that Brazil’s unemployment rate fell to 6 percent last month from 6.2 percent in March. The median estimate of 38 analysts surveyed by Bloomberg was for the jobless rate to hold steady.

Average Income

Workers’ average income in April rose 6.2 percent from a year ago to 1,719.50 reais ($840) a month, the report showed. Central bank President Alexandre Tombini said this week that near-record low unemployment is helping sustain domestic demand.

Gross domestic product will rise 3.09 percent this year, down from a forecast of 3.20 percent the week before, according to a weekly central bank survey of about 100 economists at financial institutions, released this week. The economy grew 2.7 percent last year, down from 7.5 percent in 2010.

Annual service-sector prices rose 9.10 percent from a year earlier in April, compared with a 5.10 percent increase in consumer prices, Brazil’s statistics agency reported May 9.

Traders are wagering that policy makers will cut the target lending rate for a seventh straight meeting next week to provide further support for the economy as Europe struggles to resolve its debt crisis and China’s growth slows. Brazil has reduced the benchmark Selic by 350 basis points to 9 percent since August, more than any other nation in the Group of 20.

To contact the reporters on this story: Josue Leonel in Sao Paulo at jleonel@bloomberg.net; Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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