Brazil Swap Rates Climb on Industrial Confidence; Real Declines

Brazil’s swap rates rose as a boost in industrial confidence fueled speculation the central bank will increase borrowing costs this year to contain inflation.

Swap rates due in July 2014 climbed six basis points, or 0.06 percentage point, to 7.44 percent, after falling eight basis points yesterday, the most since Dec. 6. The real depreciated 0.1 percent to 2.0428 per dollar.

The industrial confidence index increased to 106.6 in January, the highest level since June 2011, the Getulio Vargas Foundation reported today in a preview. Industrial capacity rose to 84.5 percent. The ZEW Center for European Economic Research in Mannheim said its German index of investor and analyst expectations jumped to 31.5 this month, the highest level since May 2010, from 6.9 in December.

“Swap rates are on the rise after there was an improvement in industrial confidence and capacity,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil in Sao Paulo, said in a phone interview. “If it is confirmed that the German economy is improving, that will help the European recovery and favor growth in Brazil.”

Brazil’s central bank held its target lending rate at a record low 7.25 percent last week for a second straight policy meeting, saying the domestic recovery was “less intense” than expected and the balance of risks for inflation worsened in the short term.

The Treasury sold 1.85 billion reais ($906 million) of inflation-linked bonds due in 2018 and 2022 today. There were 673,450 notes sold out of 2.5 million offered.

Analysts covering Brazil increased their forecast for 2013 inflation and cut their growth estimate for a third straight week in a central bank survey released yesterday.

Inflation Outlook

Brazil’s consumer prices will increase at an annual pace of 5.65 percent in 2013, according to the median estimate of about 100 analysts. Analysts had forecast 5.53 percent in the previous week. Gross domestic product will expand 3.19 percent this year, down from the previous week’s estimate of 3.20 percent, the survey showed.

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 rose 5.84 percent in December from a year earlier after rising 5.53 percent in the prior month, the national statistics agency reported Jan. 10.

While retail sales rose for the sixth straight month in November, the annual rate of growth slowed to 8.4 percent from 9.1 percent in October. Industrial production fell in November for the second time in three months.

Falling Real

The real declined today on speculation the central bank will act to prevent the currency from gaining further, said Eduardo Suarez, a Latin America foreign-exchange strategist at Bank of Nova Scotia in Toronto.

“We see the real’s range as 2.01 to 2.06 per dollar,” he said in an e-mailed report. “The major question is whether the central bank will intervene to defend 2 per dollar.”

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 rallied 1 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.

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