Brazil Swap Rates Drop on Evidence of Slowdown; Currency Rises

Brazil’s swap rates fell to a record low as reports this week showed industrial production grew less than economists forecast and vehicle sales contracted, spurring bets policy makers will make more cuts in borrowing costs.

Swap rates on contracts due in January 2014 fell two basis points, or 0.02 percentage point, to 7.59 percent, a record low on a closing basis. The real appreciated 0.2 percent to 2.0189 per dollar in Sao Paulo after reaching 2.0173, the strongest intraday level since Sept. 17.

Car sales dropped 34 percent in September from a month earlier, the National Vehicle Manufacturer’s Association reported today. Brazil’s industrial output rose 1.5 percent in August from the previous month, the national statistics agency said Oct 2. The increase was smaller than all except one estimate from 39 economists surveyed by Bloomberg, whose median forecast was for a 2 percent gain.

“Those last indicators show weak activity, and bets are increasing that there will be another 25 basis point cut in the Selic rate,” Thiago Carlos, an economist at Link SA in Sao Paulo, said in a phone interview.

Also today, the government set investment and local content requirements for automakers to obtain tax breaks in the world’s fifth-largest car market, a move designed to boost efficiency and safeguard jobs.

Rate Reductions

The central bank has cut the target lending rate by 5 percentage points since August 2011 to a record low 7.5 percent to support the economy.

Brazil’s real touched a two-week high as the Federal Reserve’s third round of asset purchases known as quantitative easing and the European Central Bank’s bond buying-plan bolstered demand for emerging-market assets.

“With a better mood in global markets after QE3 and before the expectations for flows to Brazil, the real should appreciate,” Jose Carlos Amado, a currency trader at Renascenca DTVM, said in a phone interview from Sao Paulo. Room for appreciation is small because Brazil’s central bank may intervene to limit gains, Amado said.

European Central Bank President Mario Draghi said today in Slovenia that the bank is ready to start buying government bonds as soon as the necessary conditions are fulfilled. Policy makers held the target lending rate at a record low 0.75 percent. The Fed said on Sept. 13 that it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month to boost growth and reduce unemployment.

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