Brazil Swap Rates Rise on Fuel Price Speculation; Real Declines

Brazil’s swap rates rose to a two-month high as a newspaper report saying the government may raise fuel prices raised speculation that policy makers will speed up the pace of borrowing-cost increases to tame inflation.

Swap rates on the contract due in January 2015 rose for a fourth day, increasing four basis points, or 0.04 percentage point, to 10.06 percent in Sao Paulo, the highest closing level since June 24. The real fell 0.7 percent to 2.3407 per dollar, touching a four-year low even as the central bank sold currency swap contracts worth $1.98 billion.

The Brazilian government may authorize state-run Petroleo Brasileiro SA to increase fuel prices to bolster its profits, Sao Paulo-based newspaper Valor Economico reported today, citing a source at the presidential palace who it did not identify. Brazil’s Energy Minister Edison Lobao today denied that the government is studying plans to raise energy costs. The real reversed an earlier gain, declining against the greenback with most of its emerging-market dollar counterparts.

“We have a stronger dollar and news that the government may increase fuel prices,” Newton Rosa, the chief economist at SulAmerica Investimentos in Sao Paulo, said in a phone interview. “Inflation was lower in the past but the trend now is for it to increase.”

Lobao said Aug. 13 that the government would assess a request from Petrobras for a fuel price increase.

Annual inflation slowed to 6.27 percent in July from 6.70 percent in June, according to the national statistics agency. The central bank targets annual price increases of 4.5 percent, plus or minus two percentage points.

Target Rate

Policy makers have embarked on the biggest series of borrowing-cost increases among Group of 20 nations to curb inflation. The central bank raised the target rate by a half-percentage point on July 10 to 8.50 percent, bringing it up 1.25 points from a record-low 7.25 percent in April.

“Raising fuel prices is a momentary thing, but it may have more permanent secondary effects, and it’s those effects that are moving swap rates,” Diego Donadio, a Latin America strategist at Banco BNP Paribas Brasil SA, said by phone from Sao Paulo. “There’s an expectation of a more intense cycle of tightening than the market anticipated.”

Traders are adding to bets that the central bank will raise rates by 50 basis points in October following a half-percentage point increase in August, swaps trading shows.

Brazil’s currency has lost 13 percent in the past three months, the most among major emerging-market currencies, boosting the cost of imports.

Economic Activity

The real deepened its decline after U.S. jobless claims unexpectedly dropped last week to the lowest level in almost six years, prompting speculation the Federal Reserve will reduce stimulus as soon as next month. The central bank intervened in the foreign-exchange market today for the 24th time since May 31.

“The central bank will have to work up a sweat to contain the dollar’s gain,” Rosa said.

The 10-year U.S. Treasury yield rose six basis points to 2.77 percent after earlier touching 2.8 percent for the first time since August 2011.

Brazil’s seasonally adjusted economic activity index, a proxy for gross domestic product, rose 1.13 percent percent in June from the previous month, the central bank said in a report today. Analysts expected a 1.2 percent increase, the median estimate of 25 economists surveyed by Bloomberg. The prior month, economic activity fell a revised 1.5 percent.

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