Brazilian Swap Rates Rise on Inflation Concern; Real Declines

Brazil’s swap rates climbed to a four-week high as economic optimism in the U.S. spurred speculation that the South American nation’s central bank will step up increases in borrowing costs to curb inflation.

Swap rates on the contract due in January 2015 rose seven basis points, or 0.07 percentage point, to 8.41 percent at 5:39 p.m. in Sao Paulo, the highest level on a closing basis since April 17. The real depreciated 0.6 percent to 2.0194 per U.S. dollar after rallying yesterday.

U.S. households reduced debt during the first quarter by 1 percent to the lowest level since 2006, resuming a deleveraging trend in the wake of the financial crisis, according to the Federal Reserve Bank of New York. A separate report showed confidence among U.S. small businesses advanced.

“The deleveraging cycle in the U.S. could open space for sustainable recovery of the American economy,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil in Sao Paulo, said in a telephone interview.

Annual inflation in Brazil has remained above the 4.5 percent midpoint of the central bank’s target range of 2.5 percent to 6.5 percent since central bank President Alexandre Tombini took office in January 2011. It slowed to 6.49 percent in April after accelerating to 6.59 percent in the prior month.

The central bank’s 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.

Weaker Real

The real fell against the dollar as optimism in the U.S. boosted the U.S. currency and on speculation that Deputy Finance Minister Nelson Barbosa will be replaced by an economist who is more bearish on the real, Rostagno said.

Barbosa is leaving his position in June for “personal reasons,” according to an e-mailed statement from the Finance Ministry.

The real was headed for a third straight week of trading weaker than 2 per dollar after policy makers swung this year between selling currency swaps to prevent it from falling too quickly and offering reverse currency swaps to protect exporters by reining in gains.

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