Brazil’s swap rates climbed as a weakening real threatened to stoke inflation by making imports more expensive, adding to speculation that the central bank will further raise borrowing costs.
Swap rates on contracts maturing in January 2015 rose for a second straight day, increasing four basis points, or 0.04 percentage point, to 11.37 percent. The real dropped 1.1 percent to 2.4260 per dollar, the biggest decline among major currencies tracked by Bloomberg.
The real has dropped 3.9 percent in the past three months on concern fiscal deterioration will lead to a lower credit rating and as emerging-market currencies slumped amid speculation that the tapering of Federal Reserve stimulus will erode demand for developing nations’ assets. Brazil’s central bank reported a foreign-exchange net inflow of $46 million this month through Feb. 7.
“There are worries regarding a drought, government spending and investors’ perception of Brazil, which seems to be more vulnerable to the market’s turbulence,” Joao Paulo de Gracia Correa, a foreign-exchange manager at Correparti Corretora in Curitiba, said in a phone interview.
Brazil’s worst drought and heat wave in decades threaten to reduce crop yields and drive up prices. Receding reservoirs may force utilities to rely on expensive alternatives to hydroelectric power. To curb inflation, the central bank lifted the target lending rate last month by 50 basis points for a sixth consecutive meeting, increasing it to 10.50 percent.
Brazil sold $197 million of foreign-exchange swaps today as part of daily offerings announced Dec. 18 to support the real and limit import price increases.
Policy makers will raise borrowing costs to 11.25 percent by year-end as inflation accelerates, according to the median forecasts of about 100 economists in a central bank survey published Feb. 10.
The government will probably pave the way for a more austere fiscal policy in 2014 by announcing spending cuts of 43 billion reais in February, according to a report by Credit Suisse Group AG analysts.
The budget deficit grew in December to 3.3 percent of gross domestic product, compared with 3.4 percent in October, the widest in four years. Standard & Poor’s and Moody’s Investors Service cited deteriorating finances when they lowered their outlooks last year on Brazil’s credit, which both rate at two levels above junk.
“What’s more important than how much they cut is how they cut it,” Eduardo Suarez, a Latin America currency strategist at Bank of Nova Scotia, said in a phone interview from Toronto. “You want more long-lasting changes.”