Brazil Swap Rates Rise as Falling Real Adds to Inflation Concern

Brazil’s swap rates climbed for a second straight day as the real’s decline toward a five-month low added to speculation that accelerating inflation will spur the central bank to extend borrowing cost increases.

Swap rates on contracts maturing in January 2016 rose nine basis points, or 0.09 percentage point, to 11.94 percent at the close in Sao Paulo. The real dropped 0.7 percent to 2.3606 per U.S. dollar after declining on Jan. 8 to 2.3968, the weakest level since August.

“The real is falling, so I would expect the swap rates to move upwards,” Eduardo Suarez, Latin America strategist at Bank of Nova Scotia, said in a telephone interview from Toronto.

The currency has dropped 7.9 percent in the past three months on concern fiscal deterioration under President Dilma Rousseff’s administration will lead to a lower credit rating and amid speculation that the tapering of Federal Reserve stimulus will undermine demand for Brazil’s assets. The decline in the real is the biggest among 16 major dollar counterparts after the Australian dollar and South African rand.

A weaker real helps Brazil by making industry more competitive, Luciano Coutinho, president of Brazil’s state development bank, said at an event in Madrid. While depreciation makes it harder to manage inflation, a drop to 2.45 per dollar wouldn’t be a “big deal,” he said

To support the real and limit import price increases, Brazil sold $198 million of foreign-exchange swaps today under program announced Dec. 18 that offers $200 million each trading day until at least June 30.

Swap Rollovers

The central bank also extended the maturity today on $1.23 billion of the $11 billion of swaps due Feb. 3, increasing the amount rolled over to $4.92 billion. The bank extended maturities in offerings last month on all of the $9.9 billion of contracts due Jan. 2.

Brazil lifted the target lending rate by 50 basis points for a sixth straight meeting last week, raising it to 10.50 percent. The decision came after the government reported that consumer prices rose 5.91 percent in 2013 even as central bank President Alexandre Tombini said in October that inflation would be slower than the prior year’s 5.84 percent.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE