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Brazil Swap Rates Rise on Economy; Real Gains After Intervention

Brazil’s longer-term swap rates rose after a report showed economic activity grew in July at the fastest pace in 11 months, reducing speculation that the central bank will sustain the pace of cuts in borrowing costs.

The real extended its gain driven by the Federal Reserve’s announcement yesterday of more stimulus after Brazil’s central bank sold 11 percent of 70,000 reverse currency swap contracts offered in a second auction today to limit the exchange rate. Finance Minister Guido Mantega said the government will maintain an active currency policy to avoid excessive appreciation or depreciation of the real.

Swap rates on contracts due in January 2016 increased two basis points, or 0.02 percentage point, to 8.94 percent in Sao Paulo. The real gained 0.4 percent to 2.0121 per dollar after touching 2.0075, the strongest intraday level since Aug. 21. The currency climbed 0.8 percent this week.

The economic pickup “corroborates the central bank’s indication that the economy could be growing around 4 percent annualized by year-end,” said Newton Rosa, the chief economist at SulAmerica Investimentos, in a phone interview from Sao Paulo.

The non-seasonally adjusted economic activity index rose 2.34 percent in July from a year earlier after a 0.99 percent gain in the prior month, the central bank reported. The median forecast of 23 economists surveyed by Bloomberg was for a 2.1 percent annual pace of growth.

The central bank sold 7,400 of 70,000 reverse swap contracts offered in its second auction today including 2,200 contracts due in November for $110 million and 5,200 contracts due in December for $260 million.

Second Auction

Today’s second swap auction attracted less demand after many investors had already rolled over their contracts in the first auction, said Jose Carlos Amado, a foreign-exchange trader at Renascenca Dtvm Ltda.

“Demand was stronger in the morning because you had a bigger lot expiring,” he said in a phone interview from Sao Paulo. “The market prefers to do rollovers instead of buying new contracts.”

The real pared its gain after the central bank sold in today’s first auction 35,700 of 36,000 contracts offered including 11,100 due in November for $554 million and 24,600 due in October for $1.23 billion.

The currency at 2 per U.S. dollar allows manufacturers to remain competitive, Mantega said in Sao Paulo. Trade Minister Fernando Pimentel said today the government won’t give up on making the real competitive and will continue to intervene.

The real has fallen 7.2 percent this year, the most among 16 major counterparts against the U.S. currency tracked by Bloomberg.

‘Plastered’ Market

“In Brazil, the market has been plastered,” said Reginaldo Galhardo, a trader at Treviso Corretora, in a phone interview from Sao Paulo. “There is no way for the real to gain beyond 2 per dollar the way Mantega and the central bank are treating the exchange rate.”

Most of the major currencies including the Mexican peso rallied after the Fed said yesterday it plans to buy mortgage securities and hold its target lending rate near zero until at least the middle of 2015.

Brazil’s policy makers have cut the target lending rate nine times since August 2011 to a record low 7.5 percent to bolster economic growth.

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