Brazil Swaps Traders Shrug Off Surprise Jump in Cost of Living

  • Brazil’s currency gain as prices of raw materials advance
  • Inflation accelerated more than all forecast in mid-May

Brazilian swap rates slid, even after consumer prices rose faster than forecast, in an early vote of confidence that the new administration will be able to slow inflation.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, declined 0.05 percentage point to 12.72 percent on Friday, even as inflation accelerated more than all analysts forecast in the month through mid-May. The real strengthened 1.2 percent to 3.5212 per dollar, the most among emerging-market currencies, as commodities gained.

Brazilian equities and the real are among the world’s best performers this year as lawmakers suspended President Dilma Rousseff while she faces a trial in the Senate on allegations she doctored fiscal accounts. Michel Temer took over as acting president last week, naming a new finance minister and central bank president.

"This drop in the swaps clearly reflects better expectations with the new economic team in place," said Jessica Strasburg, an economist at CM Capital Markets in Sao Paulo. "There is no environment to keep rates so high when the economy is in such dire situation."

Swaps on contracts due in 12 months or less rose.

Temer tapped Henrique Meirelles, a former president of BankBoston Corp. who served as Brazil’s central bank chief between 2003 and 2010, to head his finance ministry. Meirelles chose Massachusetts Institute of Technology-trained economist Ilan Goldfajn to lead Brazil’s central bank. Goldfajn was previously chief economist at Itau Unibanco SA.

Economists reduced their 2017 Selic forecast to 11.5 percent from 11.75 percent the prior week, according to the weekly Focus survey conducted May 13 and published earlier this week. They also lowered their IPCA inflation forecast to 5.5 percent, down from 5.62 percent previously.

The cost of hedging Brazil’s sovereign debt against losses using five-year credit-default swaps dropped 3.7 basis points to 346 basis points.

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