Brazil Swap Rates Rise as U.S. Jobs Trump Output; Real Unchanged

Brazil’s swap rates climbed as U.S. employment gains prompted traders to step up wagers that the South American country’s central bank will seek bigger increases in borrowing costs as it tries to contain inflation.

Swap rates on the contract due in January 2015 rose eight basis points, or 0.08 percentage point, to 8.27 percent in Sao Paulo. The rates fell one basis point this week. The real was little changed at 2.0089 per dollar, leaving it down 0.5 percent since April 26.

Employment in the world’s largest economy increased more than analysts forecast in April and the jobless rate unexpectedly declined, the U.S. Labor Department said today. Brazil’s national statistics agency reported that industrial production increased 0.7 percent in March, missing the 1.3 percent median estimate of analysts surveyed by Bloomberg.

“The external market improved today, but internally, things continue to be negative,” Francisco Carvalho, the head of currency trading at BGC Liquidez DTVM, said by telephone from Sao Paulo. “The government is in a tricky spot.”

Brazil’s central bank board voted 6 to 2 on April 17 to raise the target lending rate by 25 basis points to 7.50 percent from a record low 7.25 percent, saying in its statement accompanying the decision that “external uncertainties” required “monetary policy be managed with caution.”

Brazil’s industrial production contracted 3.3 percent in March from a year earlier, the biggest drop since December 2012. The median forecast of economists surveyed by Bloomberg was for a 2.4 percent drop.

‘Weak’ Output

“The indicator was weak,” Newton Rosa, the chief economist at Sul America Investimentos in Sao Paulo, said in a telephone interview. “The central bank is stuck in a trap of high inflation and low growth.”

President Dilma Rousseff’s administration has worked to revive Brazil’s economy by extending tax reductions and cutting electricity rates.

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.

The real ended little changed today as speculation the government will contain currency gains offset increased demand for emerging-market assets sparked by higher-than-forecast employment increases in the U.S., according to Rosa.

Currency Policy

“The performance of the real reflects the idea that the government won’t let it depreciate much because of inflation, but it also won’t let it gain much,” Rosa said.

The central bank has swung between selling currency swaps to prevent the real from falling too quickly to contain inflation and offering reverse currency swaps to protect exporters by reining in gains.

The U.S. jobless rate fell to a four-year low of 7.5 percent in April as employers added 165,000 workers, Labor Department figures showed today in Washington. The median forecast of economists surveyed by Bloomberg was for an increase of 140,000.