Brazil Swap Rates Drop as Services Confidence Falls; Real Slips

Brazil’s swap rates fell for a fourth day as a decrease in the services confidence index damped speculation that the central bank will raise borrowing costs to contain inflation.

Swap rates due in January 2015 declined seven basis points, or 0.07 percentage point, to 8.33 percent. The real dropped 0.3 percent to 1.9785 per dollar, paring its rally in February to 0.7 percent, still the biggest among major Latin America currencies.

“The swap rates market is reacting to the drop in confidence in the service sector,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil, said in an interview.

The central bank will decide next week whether to hold the target lending rate at a record low 7.25 percent for a third straight meeting to support the economy even as inflation has exceeded the 4.5 percent midpoint of its preferred range for more than two years.

Brazil’s services confidence index fell 2.7 percent in February from a month earlier to 122.1, the Getulio Vargas Foundation reported today. The manufacturing industry producer price index decreased 0.04 percent in January after increasing a revised 0.41 percent in the previous month, the national statistics agency reported.

President Dilma Rousseff said at an event yesterday in Brasilia that the government needs to maintain a flexible currency policy. A photo on the front page of the daily newspaper Valor Economico shows her holding a note saying, “affirm inflation control as a value in and of itself.”

Net Outflow

The real slipped a day after the central bank reported a net currency outflow of $2.8 billion in the month through Feb. 22 and $5.2 billion this year.

“If the net currency flows do not improve into March, we can expect the Brazilian central bank to increase its intervention in the forwards market via swaps in order to contain the real’s weakness and inflation pressure,” Flavia Cattan-Naslausky, local markets strategist at Royal Bank of Scotland Group Plc in Stamford, Connecticut, wrote in an e-mailed report.

The real rallied to a level stronger than 2 per U.S. dollar on Jan. 28 for the first time since July after the central bank renewed $1.85 billion of currency swaps about to expire, refraining from buying dollars to settle the contracts.

Brazil has succeeded in reducing swings in the real after letting the currency fall 19 percent over two years to protect local manufacturers, Finance Minister Guido Mantega said in an interview on Feb. 26 in New York. Now that the real is hovering at about 2 per dollar, Brazil is abandoning policies to depress the currency, he said.

Tombini’s View

Central bank President Alexandre Tombini said at a New York conference the previous day that Brazil has learned to operate in a currency war environment. A more stable real this year will help slow inflation, Tombini said.

The Getulio Vargas Foundation’s IGP-M index of producer, consumer and construction costs rose 0.29 percent this month, less than the 0.34 percent median forecast of economists surveyed by Bloomberg. The gauge rose 8.29 percent in February from a year earlier.

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