Brazil Swap Rates Fall on China Manufacturing; Real Weakens

Brazilian swap rates fell as a report that showed manufacturing improved less than forecast in China, the country’s top trade partner, fueled speculation that policy makers will limit borrowing-cost increases.

Swap rates due January 2015 fell four basis points, or 0.04 percentage point, to 8.25 percent in Sao Paulo, the lowest on a closing basis since Feb. 14. The real fell 0.1 percent, erasing earlier gains, to 2.0226 per dollar.

A preliminary April reading of 50.5 for a purchasing manager’s index published by HSBC Holdings Plc and Markit Economics compared with 51.6 in March. The median estimate of 11 economists surveyed by Bloomberg was 51.5. A figure above 50 means the number of manufacturers who said conditions improved was greater than those who said they deteriorated.

“Policy makers made it clear that the foreign scenario is a main source of uncertainty for Brazil and the world economy’s data has disappointed,” said Marcelo Fonseca, an economist at M Safra & Co DTVM, in a phone interview from Sao Paulo. “It will be difficult for the central bank to not raise rates in May, but the bets tend to converge toward a hike of 25 basis points. The total tightening cycle could be just 100 or even 75 basis points.”

The central bank’s board last week voted 6 to 2 to raise the target lending rate by 25 basis points to 7.50 percent from a record low 7.25 percent. A survey by Bloomberg showed that 18 of 58 economists had forecast an increase of 50 basis points.

Policy makers said in their statement that “resilience of inflation” required a response tempered by the central bank’s recognition that “external uncertainties” also required “that monetary policy be managed with caution.”

Price Jump

Consumer prices rose at an annual rate of 6.59 percent in March, exceeding the upper limit of the central bank’s preferred range for the first time since November 2011. The target is 4.5 percent, plus or minus 2 percentage points.

Brazil’s real fell along with most of the dollar’s 15 other major counterparts. The Associated Press, one of the world’s largest news agencies, said a hacking attack caused it to send out an erroneous Twitter post reporting explosions at the White House.

“The real dropped due to the rumors of explosions at the White House and it hasn’t totally recovered even after the rumors were dismissed because there is a lack of inflows,” said Reginaldo Siaca, superintendent of currency trading at Advanced Corretora de Cambio, in a phone interview from Sao Paulo.

Brazil’s central bank reported last week a net foreign exchange outflow of $5.1 billion this year through April 12, up from $2.2 billion through April 5.

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