Brazil Swap Rates Post First Monthly Drop of Year; Real Rises

Brazil’s swap rates fell, extending their first monthly decline this year, as a drop in industrial confidence added to speculation that the central bank’s interest-rate increases will be limited.

Swap rates on the contract due in January 2017 dropped 57 basis points, or 0.57 percentage point, this month to 8.82 percent, the lowest closing level since Jan. 29. They decreased two basis points today. The real appreciated 0.3 percent to

2.0013 per dollar, extending its monthly gain to 1 percent.

Industrial confidence fell for a second month in April, dropping to 104.2 from 105 in the prior month, the Rio de Janeiro-based Getulio Vargas Foundation said today.

“If this picture doesn’t improve, the central bank is not going to accelerate the pace of rate hikes and the cycle as a whole should be smaller,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil SA in Sao Paulo, said in a telephone interview.

Swap rates plunged this month after the central bank raised benchmark borrowing costs less than some analysts had forecast on April 17. Police makers increased the target lending rate to

7.50 percent from a record low 7.25 percent.

Consumer prices rose at an annual rate of 6.59 percent in March, exceeding the 6.50 percent upper limit of the central bank’s preferred range for the first time since November 2011. The target is 4.50 percent, plus or minus 2 percentage points.

Traders are betting the weaker industrial production and lackluster global growth will allow policy makers to limit rate increases without stoking inflation, Rostagno said.

Fed Speculation

The real rallied today against the dollar along with most of its other major counterparts on speculation the Federal Reserve will announce tomorrow that it is maintaining monetary stimulus after a report showed U.S. business activity shrank for the first time in three years.

The Brazilian currency’s gains were limited by speculation that the government will intervene to keep it trading at about 2 per dollar, according to Francisco Carvalho, the head of currency trading at BGC Liquidez DTVM in Sao Paulo.

“The market still has in its head that the government wants a weak real,” he said in a telephone interview.

Policy makers have swung between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by reining in gains.

The real rallied to a level stronger than 2 per dollar on April 26 for the first time in eight days as initial public offerings for companies including BB Seguridade Participacoes SA, the insurance unit of Banco do Brasil SA, lured foreign investors to Brazil’s economy.