Brazilian Swap Rates Rise on Gasoline Outlook as Currency Slips

Brazil’s swap rates climbed after a government official said he expects higher gasoline prices this year, adding to speculation that the central bank will extend increases in borrowing costs to curb inflation.

Swap rates on contracts maturing in January 2016 rose four basis points, or 0.04 percentage point, to 11.01 percent in Sao Paulo. The real depreciated 0.3 percent to 2.1826 per U.S. dollar.

Energy Minister Edison Lobao told reporters in Brasilia he is “confident” that Finance Minister Guido Mantega will approve a gasoline price increase this year as chairman of the state-run oil company Petroleo Brasileiro SA. President Dilma Rousseff said inflation will close the year within the central bank’s target range of 2.5 percent to 6.5 percent.

“We have the prospect that the gas prices will be increased, which is causing more speculation of further borrowing-cost increases,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimento SA, said in a telephone interview. “The president is also saying Brazil will meet its inflation target, which reinforces the notion that we’ll have more austerity.”

The real has gained 12 percent since Aug. 22, when the central bank announced its $60 billion intervention program to support the currency and curb inflation by limiting import prices. That rally from a 4 1/2-year low is the biggest among all of the world’s dollar counterparts tracked by Bloomberg, leaving it down 8.3 percent in the past six months.

‘Proved Successful’

The program of currency swaps and credit line auctions “has proved successful in curbing volatility” and could be extended beyond year-end as the U.S. Federal Reserve winds down monetary stimulus, central bank President Alexandre Tombini said in prepared remarks for an Oct. 12 speech during meetings of the International Monetary Fund in Washington.

“Tombini knows that the discussions about the Fed stimulus are coming back, and he’s putting his guard up,” Jose Carlos Amado, a currency trader in Sao Paulo at Renascenca DTVM, said in a phone interview.

Implied volatility on three-month options for the real, which reflects traders’ expectations for future price fluctuations, dropped to 11.77 percent today, the lowest level since May, according to data compiled by Bloomberg.

While inflation slowed in September for a third consecutive month, the 5.86 percent annual rate was still more than a percentage point above the middle of Brazil’s 2.5 percent to 6.5 percent preferred range.

The central bank’s board voted unanimously last week to raise the target lending rate to 9.5 percent from 9 percent. The jump from a record low 7.25 percent since April is the biggest among 49 major economies.

Before it's here, it's on the Bloomberg Terminal.