Brazil Swap Rates Rise on Energy Price Concern: Sao Paulo Mover

Brazil swap rates climbed to a two-week high on concern the government won’t reach its target for energy price cuts, forcing policy makers to boost borrowing costs to curb inflation.

Swap rates on contracts due January 2015 rose nine basis points, or 0.09 percentage point, to 7.79 percent, the highest level since Dec. 21 on a closing basis. The real weakened 0.7 percent to 2.0415 per dollar, the biggest decline in a month, as investors awaiting fourth-quarter earnings reports sought refuge in dollar assets.

Brazil’s government is weighing the risks of energy rationing as reservoirs at the country’s hydroelectric dams fall to multiyear lows, newspaper O Estado de S. Paulo reported today, citing an unidentified person within the federal administration. Central bank policy makers, who left the benchmark borrowing rate at a record low 7.25 percent at their last meeting, will announce the next decision on Jan. 16.

“If things get worse with regards to energy, swap rates could rise because the problem of supply contraction could lead to higher prices,” Vladimir Caramaschi, the chief strategist at Credit Agricole Brasil SA, said by phone from Sao Paulo. “The inflation scenario worsens if reservoirs continue shrinking.”

The Getulio Vargas Foundation said today its IPC-S gauge, which monitors prices in Brazil’s seven biggest cities, rose 0.77 percent in the 30 days ending Jan. 7, exceeding the 0.71 percent median estimate of 14 analysts surveyed by Bloomberg.

‘Surprising’ Inflation

“Inflation numbers continue surprising on the upside and are one of the principal risks for 2013,” Caramaschi said.

Centrais Eletricas Brasileiras SA is among power companies that fell today amid concern a spell of dry weather in parts of the country has drained hydropower reservoirs to the point where energy rationing may be needed.

Brazil “sees no risk of electricity rationing,” Deputy Energy Minister Marcio Zimmermann told reporters in Brasilia today. The government’s target to cut electricity costs by 20 percent will still be met, even as the low water levels force the nation to run more-expensive thermal plants to meet demand, Zimmermann said.

Oil rose, trading near the highest level in almost four months in New York on estimates that U.S. refiners boosted crude use and amid signs of an economic recovery in Europe.

Currency Swaps

A gauge of euro-region executive and consumer sentiment rose to 87 last month, exceeding the 86.3 median of 24 estimates in a Bloomberg survey.

Brazil’s central bank swung in 2012 between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by keeping the real from strengthening beyond 2 per dollar.

The real has gained since Dec. 20, when Carlos Hamilton, the central bank’s director for economic policy, said officials consider an exchange rate of 2.05 per dollar as more “adequate” when creating economic forecasts than 2.10.

The annual rate of consumer price increases as measured by the IPCA gauge has exceeded the 4.5 percent midpoint of the central bank’s target range for 27 consecutive months. Inflation unexpectedly accelerated to 5.53 percent in November from 5.45 percent the month before, the statistics agency reported Dec. 7. The government will release figures for last month on Jan. 10.

About 100 economists in a weekly survey published yesterday raised their median forecast for the IPCA to rise 5.49 percent in 2013 from 5.47 percent the week before.

The low reservoirs and rising inflation expectations are among factors that suggest the real’s appreciation “may be met with less official resistance than it was in August,” Flavia Cattan-Naslausky, a local markets strategist at RBS Securities Inc. in Stamford, Connecticut, said in an e-mailed report.

From August through October, the bank sold reverse currency swaps to keep the real weaker than 2 per dollar.

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