Brazil’s Swap Rates Drop on China Growth Concern; Real Declines

Brazil’s swap rates fell for a third day as economic growth concern in China, the South American nation’s biggest trading partner, bolstered bets that the central bank will keep borrowing costs at record lows.

Swap rates on the contract due in January 2015 dropped one basis point, or 0.01 percentage point, to 7.73 percent at the close in Sao Paulo and have fallen the same amount this week. The real depreciated 0.2 percent to 2.0339 per dollar, leaving it down 0.1 percent since Jan. 4.

Traders speculated that policy makers will leave the benchmark Selic rate unchanged on Jan. 16 as concern China’s economic recovery may falter overshadowed a report yesterday showing Brazil’s consumer prices rose last month more than forecast. China’s inflation accelerated in December, limiting room for monetary easing to support the economic recovery.

“Economic data abroad is not good, and this is pushing rate futures down,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil SA in Sao Paulo, said in a phone interview. “In Brazil, on one side economic activity is weak and on the other inflation remains high, which should prompt the central bank to keep the Selic stable.”

The real weakened today against the dollar along with most emerging-market currencies tracked by Bloomberg as China’s diminished stimulus prospects sapped demand.

China’s consumer price index increased 2.5 percent in December from a year earlier after a 2 percent gain in the prior month, the National Bureau of Statistics reported today. The median forecast of 42 economists surveyed by Bloomberg was for a 2.3 percent advance.

Augustin’s View

Brazil’s Treasury Secretary Arno Augustin said in an interview from his office in Brasilia that recent gains in the real will help tame inflation this year, allowing the central bank to keep interest rates low.

The currency “is one element why I’m more confident about what will happen to inflation in 2013,” Augustin said. “I sincerely don’t see the need of monetary policy to help” contain price pressures.

The real has rallied 5 percent since Nov. 30 in the biggest advance among the U.S. dollar’s 16 major counterparts tracked by Bloomberg.

Policy makers in Brazil left the target lending rate at a record low 7.25 percent in November after 10 consecutive reductions since August 2011 to support growth.

Faster Inflation

Annual inflation has exceeded the 4.5 percent midpoint of the central bank’s target range for 28 consecutive months. 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 yesterday.

“The data over the last few weeks has done nothing but raise concerns on the inflation front,” wrote Flavia Cattan-Naslausky, a strategist at Royal Bank of Scotland Group Plc in Stamford, Connecticut, in an e-mailed report to clients. The inflation results strengthen the view that the real’s move toward 2 per dollar and possibly as low as 1.95 “will not be met with the same amount of resistance as it was in August,” she wrote.

The central bank sold currency swaps in November and December to stem the real’s declines. From August through October, the bank sold reverse currency swaps to keep the real weaker than 2 per dollar.

Before it's here, it's on the Bloomberg Terminal.