Brazilian Swap Rates Decline on Slower Inflation; Real Weakens

Brazil’s swap rates declined to a one-month low after a report showed inflation slowed, damping speculation that the central bank will increase borrowing costs at a faster pace.

Swap rates on the contract due in January 2015 dropped nine basis points, or 0.09 percentage point, to 9.46 percent at 3:09 p.m. in Sao Paulo, the lowest level on a closing basis since June 10. The real tumbled 1.4 percent to 2.2513 per U.S. dollar after rising 0.5 percent earlier today and rallying 2.1 percent yesterday in its biggest gain since June 2012.

The Getulio Vargas Foundation reported today that its IGP-10 inflation index, which monitors wholesale, construction and consumer prices, increased 0.43 percent in the month ended July 10, less than the 0.56 percent forecast of 21 economists surveyed by Bloomberg and the prior 0.63 percent increase.

“The inflation indexes are showing improvement,” Gustavo Rangel, the chief Latin America economist at ING Bank NV in London, said in a telephone interview. “This doesn’t eliminate the need for more rate increases at the next meeting, but the spike in inflation becomes a little less worrying.”

Policy makers raised the target lending rate by a half-percentage point to 8.50 percent on July 10 in the third increase this year from a record low 7.25 percent. They raised it by a quarter-percentage point in April and 50 basis points in May. The next meeting is scheduled for Aug. 27-28.

Consumer prices rose 6.70 percent in June from a year earlier, the fastest pace in 20 months, exceeding the 6.50 percent upper level of the central bank’s target range, the government reported July 5. The median forecast of economists surveyed by Bloomberg was for a 6.77 percent increase.

U.S. Inflation

The real erased its gain today after a U.S. report showed consumer prices rose more than forecast, encouraging speculation that the Federal Reserve will curtail a stimulus program that has buoyed emerging-market assets. The currency’s three-month historical volatility increased to 12.6 percent today, its highest level since August 2012.

Credit Suisse Group AG boosted yesterday its three-month target for the currency to 2.20 per dollar from 2.30 and said it would rally to 2.15 in 12 months, citing central bank intervention, interest-rate increases to contain inflation and reduced concern that China’s economy is slowing. Nomura Holdings Inc. said the currency would “at least” return to 2.20 in coming weeks.

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