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Brazil Swap Rates Rise on Industrial Production; Real Declines

Brazilian swap rates rose for the first time in three days as a monthly increase in industrial output added to speculation the central bank’s reduction in borrowing costs will end as economic growth accelerates.

Swap rates on contracts due in January 2014 increased three basis points, or 0.03 percentage point, to 7.78 percent today in Sao Paulo. The real depreciated 0.5 percent, the most in a month, to 2.0423 per dollar.

“The industrial output was a little better than expected and this helps the government a bit, animates the market,” Andre Perfeito, the chief economist at Sao Paulo-based Gradual Investimentos, said in a telephone interview.

Central bank president Alexandre Tombini reduced the Selic target lending rate by a half-percentage point last week to a record low 7.50 percent as he seeks to revive Latin America’s largest economy. If there is room for an additional adjustment, it “should be carried out with maximum parsimony,” policy makers said in a statement accompanying their decision.

Traders are betting there is a 90 percent chance that the central bank will cut borrowing costs one more time at the October meeting, reducing the target rate by a quarter-percentage point. Yesterday they were certain of such a reduction next month, trading in swap rates shows.

Industrial production rose 0.3 percent in July from the previous month, the national statistics agency said today in Rio de Janeiro. The median forecast of 42 economists surveyed by Bloomberg was for output to increase 0.2 percent. Output fell 2.9 percent from a year earlier, less than the median forecast, which called for a 3.3 percent contraction.

Car Sales

“Even though industrial production grew more than expected, the number isn’t necessarily a good one,” Perfeito said. “We’re still in negative territory over the past 12 months, so there ought to be one more cut in the Selic.”

Car sales rose to a record 400,000 units in August as tax cuts and lower borrowing costs spurred consumer spending, helping the economy emerge from year-long stagnation.

The government last week extended tax breaks on cars and appliances for several months to boost flagging growth that was an annualized 1.64 percent in the second quarter.

Brazil’s government will keep taking action to weaken the currency to help local manufacturers, Finance Minister Guido Mantega said last week in Brasilia.

The real is “consolidating” at a level weaker than 2 reais per dollar thanks to the government’s action as other countries try to gain an advantage through devaluation, Mantega said. The central bank auctioned reverse currency swaps on Aug. 21 for the first time since March as the real strengthened.

“The message from Brazilian officials has been crystal clear,” Diego Donadio, a strategist at Banco BNP Paribas Brasil SA, said in an e-mailed note to clients today. “They want the real to be weak to support the economic recovery.”

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