Brazil Swap Rates Drop on Signs of Falling Output

Brazil’s swap rates fell as signs of faltering industrial output spurred speculation that the central bank will keep borrowing costs at a record low to support the economy even as inflation accelerated.

Swap rates due in January 2015 fell three basis points, or 0.03 percentage point, to 7.74 percent after earlier increasing five basis points. The real gained 0.6 percent to 2.0290 per dollar.

Traders are speculating that Brazil’s central bankers will allow the real to strengthen to contain inflation while holding interest rates steady to stimulate growth. Heavy-vehicle traffic and cardboard sales declined in December, a sign that industrial production in Latin America’s largest economy contracted.

“The numbers were very weak,” Solange Srour, an economist at BNY Mellon Arx Investimentos, said in a telephone interview from Rio de Janeiro. “They suggest supply-side weakness.”

Traffic of trucks and other heavy vehicles on Brazilian highways dropped 3.1 percent in December from a year earlier, the Association of Highway Concessionaires reported. Cardboard sales fell 0.9 percent last month, the Brazilian Corrugated Paper Association said. The sale of cardboard is considered an indicator of industrial output and economic performance.

Policy makers left the target lending rate at a record low 7.25 percent in November after 10 consecutive reductions since August 2011 to support growth. The central bank’s next decision is due Jan. 16.

Accelerating Inflation

The IPCA index of consumer prices increased 5.84 percent in December from a year earlier after rising 5.53 percent in the prior month, the national statistics agency reported today. The median forecast of 30 economists surveyed by Bloomberg was for an increase of 5.79 percent. Annual inflation has exceeded the 4.5 percent midpoint of the central bank’s target range for 28 consecutive months.

The difference in yield between Brazil’s 10-year benchmark fixed-rate notes and bonds indexed to inflation, rose yesterday to 5.90 percentage points, the widest since October. The gap, known as the breakeven rate of inflation, indicates the pace of increases in consumer prices that traders expect during the life of the securities.

The real rose on speculation policy makers will allow further gains to contain inflation after a boost in China’s exports buoyed economic prospects and encouraged demand for higher-yielding assets.

China’s overseas shipments increased 14.1 percent from a year earlier, compared with the 5 percent median forecast of 40 economists surveyed by Bloomberg. China is Brazil’s biggest trading partner.

Currency Intervention

Policy makers 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 currency has gained 2 percent since Dec. 20, when Carlos Hamilton, the central bank’s director for economic policy, said officials consider an exchange rate of 2.05 as more “adequate” when creating economic forecasts than 2.10.

“For the real, we expect appreciation,” Octavio de Barros, an economist at Banco Bradesco, wrote in an e-mailed statement.

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