Brazil Swap Rates Drop as Economic Activity Falls

Brazil’s swap rates declined for a third straight day as a gauge of the economy unexpectedly contracted in September, adding to speculation that central bankers will limit borrowing cost increases.

Swap rates on contracts maturing in January 2015 fell six basis points, or 0.06 percentage point, to 10.80 percent at the close in Sao Paulo. The real rose from a two-month low, climbing

0.9 percent to 2.3143 per dollar as policy makers extended the maturity on swaps intended to support the currency and after Janet Yellen, the nominee for Federal Reserve chairman, said she will ensure monetary stimulus isn’t removed too soon.

Brazil’s economic activity, a proxy for gross domestic product, contracted 0.01 percent in September from a month earlier, the central bank reported today. The median forecast of 37 economists surveyed by Bloomberg was for 0.19 percent growth. Brazil has raised the target lending rate to 9.50 percent from a record low 7.25 percent this year, the most among 49 nations tracked by Bloomberg, to slow inflation.

“It was a bad result that shows the economy is weaker than expected,” Flavio Combat, an economist at Concordia Corretora in Sao Paulo, said in a telephone interview. “Perhaps slowing economic activity will not allow for a strong tightening in monetary policy.”

The central bank extended the maturity on $988 million of foreign-exchange swaps in a third consecutive day of rollover auctions. The bank sold $497 million of swaps earlier today as part of its $60 billion intervention to bolster the currency and curb import price increases.

Budget Deficit

The real has pared its gain since the program was announced Aug. 22 to 5.2 percent on concern the government budget deficit will lead to a credit rating cut. The central bank reported two weeks ago that the September shortfall swelled to the biggest in almost four years.

Standard & Poor’s may reduce Brazil’s BBB credit rating if fiscal accounts worsen, Regina Nunes, a managing director at the company, said in an interview last week. S&P and Moody’s Investors Service lowered their outlooks this year on Brazil’s rating, which both companies put at two levels above junk.

The real extended its gains as Yellen’s testimony before a Senate committee supported speculation that emerging-market assets will continue to benefit as U.S. rates stay low.

“It’s Yellen, Yellen, Yellen,” Hideaki Iha, a currency trader at Fair Corretora in Sao Paulo, said in a telephone interview. “She never put into doubt the frothy policy the Fed is practicing, and the real shot up.”