Brazil’s Swap Rates Jump After Currency Touches Four-Year Low

Brazil’s swap rates climbed as the real touched a level weaker than 2.4 per dollar for the first time in four years, fueling speculation inflation will prompt the central bank to step up increases in borrowing costs.

Swap rates on the contract due in January 2015 rose 33 basis points, or 0.33 percentage point, to 10.66 percent in Sao Paulo, the highest level on a closing basis since January 2012. The real declined 0.8 percent to 2.4128 per U.S. dollar, the weakest level since March 2009.

Brazil’s currency has lost 16 percent in the past three months, the most among emerging-market dollar counterparts, boosting the cost of imports and adding to inflation that has exceeded central bank targets. The real tumbled the most in 15 months on Aug. 16 after Finance Minister Guido Mantega said a weaker currency is good for local industry, deepening a selloff sparked by concern the U.S. will curb monetary stimulus.

“With the currency at this level, we could be heading for more aggressive monetary policy,” Italo Lombardi, an economist at Standard Chartered Plc, said in a telephone interview from New York. “It’s natural that the market would bet on an acceleration” of increases in borrowing costs.

The real’s decline to a four-year low last week prompted the central bank to announce that it will roll over more than $5 billion in currency swap contracts to limit losses. Today, it sold currency swap contracts worth $2.6 billion and rolled over $986 million. The central bank plans two foreign-exchange credit line auctions and an auction of 20,000 currency swap contracts tomorrow.

The Treasury purchased 142 million reais of fixed-rate notes and 1.5 billion reais of zero-coupon bonds in an unscheduled buyback.

Real Outlook

The currency will end 2013 at 2.3 per dollar, according to the median forecast of a central bank survey of economists published today, weaker than 2.28 projected a week ago.

“The volatility in Brazil’s currency markets has made clear that we are witnessing a faster-than-expected adjustment of investors’ portfolio positions to the prospects of monetary normalization in the U.S.,” Tony Volpon, director of emerging-market research for the Americas at Nomura Holdings Inc., wrote in a research report. “The need for investors to rebalance portfolios will temporarily lead to an ‘overshoot’ in the nominal exchange rate.”

The real’s decline is challenging policy makers’ goal of keeping annual inflation below the 6.5 percent upper limit of a target range while seeking to bolster economic growth.

Inflation will probably accelerate this month, and the decline in the real is fueling price increases, Carlos Hamilton, the central bank’s economic policy director, said on Aug. 12.

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.

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