Brazil Swap Rates Decline Before Inflation Report; Real Advances

Brazil’s swap rates fell before a report forecast to show annual inflation slowed in April, encouraging speculation that the central bank will limit increases in borrowing costs.

Swap rates on the contract due in January 2015 declined five basis points, or 0.05 percentage point, to 8.19 percent, matching the lowest level on a closing basis since Feb. 14. The real advanced less than 0.1 percent to 2.0078 per dollar after earlier falling as much as 0.3 percent.

“With inflation lower here and central banks easing around the world, it will be difficult for Brazil’s central bank to have a tightening cycle of more than one percentage point,” Luis Otavio de Souza Leal, the chief economist at Banco ABC Brasil in Sao Paulo, said in a telephone interview.

The Reserve Bank of Australia lowered its main rate by a quarter-percentage point to 2.75 percent a day after European Central Bank President Mario Draghi said further cuts in rates are possible following a reduction to a record low last week.

Brazil’s annual inflation slowed to 6.42 percent in April from 6.59 percent in the prior month, according to the median forecast of 28 economists surveyed by Bloomberg. The statistics agency is due to release the IPCA inflation data tomorrow.

The central bank board voted 6 to 2 last month to increase the target lending rate to 7.50 percent from a record low 7.25 percent, saying in its statement that the “resilience of inflation” required action.

Industrial Output

The national statistics agency reported last week that industrial production expanded 0.7 percent in March, missing the 1.3 percent median forecast of analysts surveyed by Bloomberg. Output contracted 3.3 percent from a year earlier, the biggest drop since December 2012.

Vehicle sales rose to 333,738 in April from 283,912 in the prior month, the National Vehicle Manufacturers Association reported today in Sao Paulo.

The real has rallied 2.2 percent against the dollar this year, the most among 16 major counterparts tracked by Bloomberg after Mexico’s peso. The currency tumbled 9 percent in 2012 and 11 percent in 2011.

Foreign investors bought about 67 percent of BB Seguridade Participacoes SA’s 11.5 billion-real ($5.7 billion) initial public offering, according to a person with direct knowledge of the matter. The rest was purchased by Brazilian investors, the person said, asking not to be identified because the information isn’t public yet. The IPO is the biggest in Brazil since July 2009, according to data compiled by Bloomberg.

While foreign demand for share sales may become a “tailwind” supporting the real in the future, the currency won’t start appreciating unless the economy picks up, according to Eduardo Suarez, a Latin America foreign-exchange strategist at Bank of Nova Scotia in Toronto.

“We must first see the economic recovery gain traction,” he wrote in an e-mailed research report.

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