Brazil Swap Rates Rise as Weakened Real Stokes Inflation Concern

Brazil’s swap rates climbed as a weakened currency and better-than-forecast industrial output added to speculation that the central bank will sustain the pace of increases in borrowing costs to curb inflation.

Swap rates on contracts maturing in January 2017 rose nine basis points, or 0.09 percentage point, to 12.32 percent at the close of trading in Sao Paulo. The real depreciated 1 percent to 2.3968 per U.S. dollar, a four-month low. The currency extended its drop after the central bank reported a net foreign-exchange outflow of $8.8 billion in December, the biggest since the start of data in 2010.

The real has fallen 7.8 percent in the past three months, the worst performance among 16 major currencies, on concern fiscal deterioration will lead to a lower credit rating and amid speculation that the tapering of Federal Reserve stimulus will sink demand for the nation’s assets.

Swap rates are moving in line with “an exchange rate that has been under pressure,” said Newton Rosa, the chief economist at Sul America Investimentos DTVM in Sao Paulo. Output “data came in better than the market expected.”

Industrial production rose 0.4 percent in November from a year earlier, the national statistics agency reported today. The median forecast from 38 economists surveyed by Bloomberg was for a contraction of 0.8 percent.

Brazil has lifted the benchmark lending rate by 2.75 percentage points since April to 10 percent, the biggest increase among 49 central banks, to curb inflation.

Inflation Report

The Getulio Vargas Foundation reported today that producer, construction and consumer prices increased 0.69 percent in December, compared with the 0.68 percent median forecast of 28 economists surveyed by Bloomberg.

The government reported last month that Brazil’s consumer prices climbed 5.85 percent in the year through mid-December, more than a percentage point above the central bank’s 4.5 percent target.

Brazil sold $199 million of foreign-exchange swaps today under a program announced Dec. 18 to auction $200 million each trading day until at least June 30 to support the currency and limit import price increases.

Standard & Poor’s and Moody’s Investors Service lowered their outlooks last year on Brazil’s credit rating, which both have at two levels above junk. The government budget deficit as a percentage of gross domestic product narrowed to 3 percent in November from 3.4 percent in the prior month, which was the widest since 2009.

Fed Minutes

The currency extended losses after minutes of the U.S. central bank’s last meeting showed today that Fed officials saw diminishing economic benefits from the bond buying program and expressed concern about risks to financial stability.

U.S. policy makers will gather Jan. 28-29 to consider the next step in their strategy of gradually reducing the pace of bond buying as the economy strengthens. The minutes didn’t describe a set schedule for the pace of asset-purchase reductions, although “a few” officials mentioned the need for a “more deterministic path.”

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