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Brazil Swap Rates Fall on Global Outlook; Real Strengthens

Brazil swap rates dropped for a third day as global economic concern reinforced speculation that the central bank will keep borrowing costs at record lows.

Swap rates on contracts due in January 2015 fell three basis points, or 0.03 percentage point, to a record low 7.85 percent in Sao Paulo. The real rose 0.1 percent to 2.0259 per U.S. dollar.

“Both the government and the central bank expect growth to come back, but it may be more muted,” Kenneth Lam, a Latin America currency and rates strategist at Citigroup Inc., said by phone from New York. “They’ve stated specifically that they want rates to be as low as possible.”

The real fluctuated after Finance Minister Guido Mantega told the daily Valor Economico that the government’s “dirty float” currency policy will last as long as necessary to defend the country’s competitiveness. A Finance Ministry official didn’t respond to e-mail and phone messages.

The currency dropped yesterday from a two-week high as the central bank auctioned 33,000 reverse currency swaps contracts out of 60,000 offered, including $849 million worth due on Dec. 3 and $799 million maturing on Jan. 2.

“The central bank should continue with the same currency policy, defending the 2 per dollar level,” Flavia Cattan-Naslausky, a strategist at Royal Bank of Scotland Group Plc, said in a phone interview from Stamford, Connecticut. “With weak economic growth, there’s no reason for the government to change its strategy, as Mantega mentioned.”

Currency Intervention

Brazil’s central bank sold $1.3 billion in reverse currency swaps on Oct. 5, $5.7 billion of contracts Sept. 12 through Sept. 17 and $350 million on Aug. 21 to weaken the real. The August reverse swaps were the first since March.

Swap rates erased their increases today after a composite index based on a survey of euro-area purchasing managers in services and manufacturing fell this month to 45.8, the lowest level in three years, London-based Markit Economics reported. Figures above 50 indicate expansion.

China’s manufacturing may shrink in October at a slower pace, according to a survey released by HSBC Holdings Plc and Markit Economics. The preliminary reading for the private purchasing managers’ index was 49.1, compared with a final reading of 47.9 last month.

Brazil’s central bank cut the target lending rate for a 10th straight meeting to a record low 7.25 percent Oct. 10 to revive the slowest growth among major emerging markets. Policy makers will boost borrowing costs by a quarter-percentage point as soon as May, trading in swap rates indicates.

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