Real Caps Worst Week Since January on Central Bank Swap Decision

Brazil’s real had its biggest weekly decline since January as the central bank refrained from starting a rollover of foreign-exchange swap contracts supporting the currency.

The real declined 1.2 percent to 2.2577 per U.S. dollar this week, the most since Jan. 24, after advancing 0.3 percent today in Sao Paulo. Swap rates, a gauge of expectations for interest-rate moves, increased 14 basis points, or 0.14 percentage point, to 11.63 percent on contracts due in January 2017. They have climbed 39 basis points since July 25.

While the central bank sold $198.7 million of currency swaps today to bolster the real and limit import price increases, it allowed the remaining $2.81 billion of contracts maturing at the beginning of the month to expire. After the close of the market, the central bank said it will rollover as much as 8,000 contracts expiring Sept. 1.

“At the end of the month, the market starts to speculate on how the central bank will proceed with its rollover program,” Joao Paulo de Gracia Correa, a foreign-exchange trader at Correparti Corretora de Cambio in Curitiba, Brazil, said by phone. “That affects currency trading.”

The real erased its losses today after a report showed that the U.S. employers added fewer jobs than economists surveyed by Bloomberg had forecast, easing concern that the Federal Reserve will pare at a faster pace a stimulus program that has supported emerging markets.

Budget Deficit

Brazil posted for June a primary budget deficit for a second straight month as policy makers struggled to fortify fiscal accounts during an economic slowdown. A report showed yesterday that the shortfall, which excludes interest payments, was 2.1 billion reais, wider than economists surveyed by Bloomberg had forecast.

Deficits in May and June make it more difficult for the government to reach its fiscal goals, Tulio Maciel, the head of the central bank’s economic research department, told reporters in Brasilia yesterday. “This will require a stronger effort from the government,” he said.

Standard & Poor’s cut Brazil’s sovereign credit rating one level in March to BBB-, the lowest level of investment grade, citing the nation’s sluggish economic growth and the expansionary fiscal policies of President Dilma Rousseff.

Economists surveyed by the central bank on July 25 said the nation’s gross domestic product will expand 0.90 percent this year, compared with the previous week’s forecast of 0.97 percent. It was the ninth consecutive week that they lowered their growth outlook.

Declining Output

Brazil’s industrial production dropped for a fourth straight month in June, falling 1.4 percent, the national statistics agency reported today.

In the U.S., employers added 209,000 jobs in July, less than the median forecast of economists surveyed by Bloomberg, which called for an increase of 230,000.

Fed Chair Janet Yellen told lawmakers last month that while her view of the economy has turned “more positive,” she’s concerned about low participation in the labor force and sluggish wage growth.