Brazil Swap Rates Fall on Concern Economy Slowing; Real Advances

Brazilian swap rates fell for a seventh day as economists cut growth forecasts and Finance Minister Guido Mantega announced spending cuts, spurring bets that policy makers will limit increases in borrowing costs.

Swap rates on the contract due in January 2017 fell four basis points, or 0.04 percentage point, to 10.33 percent after earlier rising six basis points. The real gained 0.6 percent to 2.2331 per dollar as the central bank auctioned currency swap contracts. The real advanced 0.9 percent last week.

Gross domestic product will expand 2.28 percent in 2013 and 2.60 percent in 2014, compared with the previous week’s forecasts of 2.31 percent and 2.80 percent, respectively, according to a central bank survey published today. Brazil is reducing expenditures by 10 billion reais and lowering this year’s economic growth forecast to 3 percent from 3.5 percent, Mantega said today.

“We went back to worrying about domestic activity,” Daniel Cunha, chief economist at XP Investimentos, said by phone from Sao Paulo. “The market had been pricing in as much as two increases of one percentage point and now there is talk of a half-point and a 25-basis-point increase.”

The government will meet its primary budget surplus target, which excludes interest payments, of 2.3 percent of GDP this year without reducing investments, Mantega told reporters in Brasilia. He also said Brazil will not sell bonds backed by revenues from Itaipu dam after the plan raised concerns over fiscal transparency.

Target Rate

Industrial confidence fell to 100.1 in July from 103.8 in June, according to a preview published today by the Rio de Janeiro-based Getulio Vargas foundation.

Policy makers raised the target lending rate by a half-percentage point on July 10 to 8.50 percent, the third increase this year. The central bank said in minutes of the meeting that it is appropriate to maintain the pace of increases in borrowing costs to curb inflation.

Swap rates rose earlier today after central bank President Alexandre Tombini said the fight against inflation is important for rebuilding confidence in Brazil’s economy and maintaining a gradual recovery, according to Estado de S. Paulo newspaper.

Brazil’s central bank sold 20,000 foreign-exchange swap contracts today worth $995 million to support the real, the 16th day of auctions since May 31.

The real has lost 9.4 percent in the past three months, the worst performance among major emerging-market currencies tracked by Bloomberg, as accelerating inflation helped spur street protests and hampered efforts to stimulate Latin America’s largest economy.

Analysts at HSBC Holdings Plc changed their 2013 forecast for the real to 2.30 per dollar from 2.15, and lowered the year-end 2014 forecast to 2.40 per dollar from 2.20, citing “poorer fundamentals, broad USD strength, and less effective intervention,” according to an e-mailed report today.

“Lower growth in China, further evidence of domestic constraints to growth and rising political noise” increase “downside risks” for the real, Marjorie Hernandez, a strategist with HSBC in New York, wrote in the report.

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