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Brazil Futures Yields Fall on Bets Europe to Prompt Bigger Cuts

Yields on Brazilian interest-rate futures contracts dropped the most in three weeks on concern the European debt crisis will prompt policy makers to make deeper cuts in the benchmark rate at a meeting ending tomorrow.

The real declined against the dollar, extending the biggest loss this year among the 16 most-traded currencies tracked by Bloomberg. Traders are anticipating central bank President Alexandre Tombini will reduce the 9 percent target rate by 50 basis points, the rate futures yields indicate.

“The deterioration abroad could give a more dovish tone to the Copom meeting” Andre Perfeito, the chief economist at Sao Paulo-based Gradual Investimentos, said in a telephone interview, referring to the monetary policy committee. Financial turmoil abroad is provoking a “strong deceleration” in the Brazilian economy, said Perfeito, who expects Tombini to reduce the Selic rate by 75 basis points this week.

Yields on the futures contract due in January 2014 fell 16 basis points, or 0.16 percentage point, to 8.35 percent at the close in Sao Paulo, the biggest drop since May 4. The real slid 0.5 percent to 1.9929 per U.S. dollar after touching 2.1062 on May 23, the weakest level since May 2009. It has fallen 6.3 percent this year.

President Dilma Rousseff is concerned Spain’s crisis may undermine investment in the Latin American country and will discuss the matter in a meeting with King Juan Carlos next week, Valor Economico reported, citing an unidentified government official. An official at the Foreign Relations Ministry in Brasilia didn’t return a call seeking comment.

Currency Swaps

Brazil’s real snapped four days of gains that came as the central bank auctioned currency swaps last week to curb the currency’s decline. The real has lost 4 percent this month, after weakening 4.3 percent in April.

Concern Europe’s debt crisis is worsening overshadowed speculation the central bank will auction more swaps to limit the real’s losses, according to Perfeito.

“If there were a brutal deterioration in the external environment, the real could go to 2.3 per dollar,” he said.

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

The government is considering reversing measures designed to weaken the currency, including taxes on foreign capital, said a government official aware of the discussions who asked not to be identified because they are private.

Gauging Crisis

Rousseff’s administration is gauging the extent of the crisis to decide the timing and scope of further action to shore up growth in Latin America’s biggest economy, the government official said.

There are no studies on lifting foreign capital taxes, said a press officer at the Finance Ministry, who asked not to be identified because of internal policies. The president’s office declined to comment.

The central bank has lowered Brazil’s target lending rate by 3.5 percentage points since Aug. 31 to 9 percent, the biggest reduction among the world’s 25 largest economies, according to data compiled by Bloomberg.

Latin America’s largest economy probably expanded 1.3 percent in the first quarter from a year earlier, according to the median forecast of 40 economists surveyed by Bloomberg, down from 1.4 percent growth in the last three months of 2011. The data will be released June 1.

Analysts expect industrial production was unchanged in April from the prior month following a 0.5 percent contraction in March, according to the median estimate of 43 economists surveyed by Bloomberg before the May 31 report.

“We are facing an escalation of the international crisis,” Finance Minister Guido Mantega told reporters in Brasilia last week. “This demands that we redouble our efforts to maintain economic growth at a reasonable rate.”

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