Brazil’s real fell to a two-month low as a report showed unemployment rose and traders speculated that the central bank will allow the currency to weaken as it prioritizes job creation over damping inflation.
The real slid 0.5 percent to 2.0217 per U.S. dollar, the weakest closing level since Jan. 25. The currency pared its first-quarter gain to 1.5 percent, still the most among 16 major currencies tracked by Bloomberg after Mexico’s peso. Swap rates due in January 2014 rose three basis points, or 0.03 percentage point, to 7.77 percent, extending the increase this year to 63 basis points.
“The market knows that the real has already been stronger and that didn’t help inflation,” Jose Carlos Amado, a currency trader at Renascenca DTVM in Sao Paulo, said in a phone interview. “Rather, it harmed exporters.”
Unemployment increased to 5.6 percent in February, the highest level since June, the national statistics agency said today. Brazil’s central bank reduced its 2013 growth forecast to 3.1 percent from 3.3 percent and said the probability that price increases will breach the 6.5 percent upper limit of its target range for the first time in a decade has increased to 25 percent, up from 14 percent in December.
The real rose yesterday for the first time in seven days after the central bank sold currency swaps to limit its decline. The intervention was the first since March 11, when the central bank sold reverse currency swaps to weaken the real.
The central bank has swung between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by preventing gains. The real closed at a 10-month high of 1.9442 per U.S. dollar on March 8 before the central bank intervened three days later to weaken it.
Minutes of the central bank’s March 5-6 meeting indicated that an increase in the target lending rate from a record low 7.25 percent wasn’t imminent as policy makers said “a cautious management of monetary policy” was needed. The monetary policy committee will next meet April 16-17 and May 28-29.
Central bank economic policy director Carlos Hamilton told reporters in Brasilia today that tax cuts only have a short-term impact on prices and inflation converging to the 4.5 percent target in 2013 is “unrealistic.” He said inflation has accelerated on fuel prices, a tight labor market and the devaluation of the currency.
President Dilma Rousseff criticized anti-inflation policies that sacrifice growth at a summit yesterday in Durban, South Africa. She later said her comments were manipulated and reiterated her government’s commitment to inflation control.
Fitch Ratings said in a report yesterday that a “continued and more prolonged” slowdown in Brazil combined with an expansionary fiscal stance may hinder government debt reduction. The company rates Brazil at BBB, the second-lowest level of investment grade.