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Brazilian Real Posts Biggest Weekly Advance in Emerging Markets

The real posted the biggest weekly gain in emerging markets as Brazil reported higher-than-forecast foreign investment a day after the government pledged to reduce spending.

The real appreciated 1.8 percent this week to 2.3457 per U.S. dollar, the strongest closing level since Jan. 20. It rose 1.1 percent in Sao Paulo today. Swap rates maturing in January 2016 fell five basis points, or 0.05 percentage point, to 11.77 percent, extending their decrease since Feb. 14 to 46 basis points.

Finance Minister Guido Mantega said today on a conference call that Brazil will make an extra effort to meet its fiscal goals if a boost in spending is needed to compensate for higher energy costs. The government announced yesterday that it would cut 44 billion reais from this year’s budget, allowing Brazil to meet a primary surplus target, excluding interest payments, of 1.9 percent of gross domestic product.

“The market has seen most of the news of the week as positive, and Mantega has been telling the market what the market wants to hear,” Jose Carlos Amado, a foreign-exchange trader at Renascenca DTVM in Sao Paulo, said by telephone. “There is still some doubt coming from international turmoil in emerging markets, but things improved this week for Brazil.”

Swap rates tumbled this week partly on speculation that improved fiscal management will help slow inflation and allow the central bank to limit further increases in borrowing costs. The government’s goal is to consolidate public accounts and curb price increases, Mantega said yesterday.

Foreign Investment

While the central bank reported that foreign direct investment declined to $5.1 billion last month, the amount was higher than the median forecast of analysts surveyed by Bloomberg, which called for $4 billion. Brazil posted a $11.6 billion deficit in the current account, the broadest measure of trade in goods and services, compared with the $11.7 billion median estimate. Mantega said today that the shortfall will narrow in 2014.

“These numbers slightly reduce concern over the country’s external accounts financing,” Luciano Rostagno, the chief strategist at Banco Mizuho do Brasil in Sao Paulo, said in a telephone interview.

The currency has dropped 1.7 percent in the past three months on concern fiscal deterioration will lead to a lower credit rating amid turmoil in other developing nations and speculation that the U.S. Federal Reserve will further taper monetary stimulus. Brazil’s budget deficit grew in December to 3.3 percent of GDP, compared with 3.4 percent in October, the widest in four years.

Currency Swaps

To support the real and limit import price increases, Brazil sold $197.5 million of foreign-exchange swaps today under a program announced in December. The central bank also held an auction to extend maturities on swaps due in March, rolling over $516.8 million.

Shorter-term swap rates climbed earlier today as the national statistics agency reported that consumer prices rose 5.65 percent in the 12 months through mid-February, higher than the median forecast of 5.62 percent from economists surveyed by Bloomberg and the central bank’s 4.5 percent target.

Brazil lifted the benchmark lending rate on Jan. 15 by 50 basis points for a sixth consecutive meeting, increasing it to 10.50 percent. The central bank has raised borrowing costs by 325 basis points since April.

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