Brazil Swap Rates Rise on Faster Inflation While Real Fluctuates

Brazilian swap rates rose as investors wagered on higher interest rates after inflation accelerated more more than economists forecast in October. The real fluctuated as emerging-market currencies weakened after a better-than-forecast U.S. jobs report.

Longer-term swap rates advanced, with rates on the contract maturing in January 2021 rising 0.06 percentage point to 15.63 percent Friday in Sao Paulo. Brazil’s currency added 0.3 percent to 3.7688 after falling as much as 1.6 percent.

Brazil has struggled to damp inflation amid a tumble in the currency and a surge in government spending, while forecasts for the country’s longest recession since the 1930s makes policy makers hesitant to raise borrowing costs. Consumer prices surged 9.93 percent in October from a year earlier, the fastest pace since 2003.

"It is very concerning to see inflation at such levels," said Solange Srour, the chief economist at ARX Investimentos in Rio de Janeiro. Accelerating price increases might pressure the central bank to raise rates at a time when it should be easing, Srour said.

Swap rates started rising Thursday after the central bank’s economic policy director, Altamir Lopes, said policy makers would do whatever is necessary to meet an inflation target of 4.5 percent in 2017. The country’s central bank has kept the benchmark interest rate unchanged in its past two meetings at 14.25 percent, the highest in nine years.

The real gained, defying a slump in other emerging-market currencies following a better-than-forecast jobs report in the U.S., as traders at Fair Corretora and Jive Asset cited strong flows from foreign buyers. 

The currency advanced 2.3 percent this week, the best weekly performance since Oct. 9, amid speculation that an increase in mergers and acquisitions in Latin America’s biggest signals investors see value in the country’s assets. Coty Inc. agreed to buy the personal-care and beauty division of Hypermarcas SA for about $1 billion in cash, according to a statement Nov. 2.

"There was a positive sentiment regarding the deals announced this week, and there are expectations that there is more to come in the near future. That gives some confidence to traders bringing money to Brazil," said Reginaldo Galhardo, a foreign-exchange manager at Treviso Corretora de Cambio in Sao Paulo.

The currency has tumbled 30 percent this year, the most in emerging markets.

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