Brazil’s Swap Rates Rise as Unemployment Rate Falls; Real Drops

Brazil’s swap rates rose for a fourth day after the unemployment rate dropped to a record low for the month of November, fueling speculation that the central bank will raise borrowing costs to control inflation.

Swap rates due in January 2015 climbed five basis points, or 0.05 percentage point, to 7.87 percent at 3:23 p.m. in Sao Paulo, extending its weekly increase to 23 basis points, the biggest since the five days ended May 25. The currency depreciated 0.4 percent to 2.0770 per U.S. dollar after advancing yesterday to 2.0693, the strongest since Nov. 14.

Unemployment fell to 4.9 percent last month from 5.3 percent in October, the national statistics agency reported today. The reading was lower than forecast by all except two of 33 economists surveyed by Bloomberg, whose median estimate was for the jobless rate to decrease to 5.1 percent.

“The labor market is a factor of concern for inflation,” Rafael Laurindo, an economist at Porto Seguro Investimentos in Sao Paulo, said in a telephone interview. “The tendency is for the job market to remain heated.”

Swap rates climbed two days after Finance Minister Guido Mantega said Brazil will allow gasoline prices to rise in 2013, heightening concern inflation will accelerate.

Brazil’s annual rate of consumer price increases as measured by the benchmark IPCA index has exceeded the 4.5 percent midpoint of the central bank’s target range for 27 consecutive months. Annual inflation unexpectedly accelerated to 5.53 percent in November from 5.45 percent the month before, the statistics agency reported Dec. 7.

Target Rate

Policy makers left the target lending rate at a record low 7.25 percent last month following 10 straight reductions to support Latin America’s largest economy.

The real rallied yesterday to a one-month high after Carlos Hamilton, the central bank’s director for economic policy, said a weaker exchange rate has contributed to inflation. Brazil sees 2.05 per dollar as more “adequate” when creating its economic forecasts than 2.10, Hamilton said.

The real advanced earlier this week as as the central bank eased reserve requirements on bets against the dollar to boost the local currency. Financial institutions are required to collect reserve requirements on short-dollar positions above $3 billion instead of the previous $1 billion level, the central bank announced Dec. 18 in a move to boost the local currency. A short is a bet an asset will lose value.

The real has risen 0.4 percent this week, paring its drop in 2012 to 10 percent, still the worst performance among 16 major currencies tracked by Bloomberg. A weaker exchange rate can add to inflation by making imports more expensive.

U.S. Budget

Speculation that policy makers favor a boost in the currency to curb inflation has been offset by concern that the U.S. budget impasse will stall global economic growth and limit gains in emerging-market assets.

“The signal is that the government wants the real stronger than 2.1 because a less depreciated real can be positive for inflation,” Laurindo said. “But this discussion of the U.S. budget is generating pessimism among investors.”

Policy makers have swung this year between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by keeping the real from strengthening beyond 2 per dollar.

The central bank auctioned dollar credit lines for a fifth straight day to stimulate liquidity. The credit lines help boost the supply of U.S. currency as Brazilian companies send dollars abroad to balance their books at year-end.

December was headed for the biggest net outflow of dollars in two years as the central bank reported $4.2 billion this month through Dec. 14, compared with $4.3 billion in June 2010.

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