Brazil’s Swap Rates Decline After Economy Contracted in June

Brazil’s swap rates fell after data showed the economy shrank in June by the most in 13 months, adding to speculation policy makers will limit further increases in borrowing costs.

Swap rates on contracts maturing in January 2017, a gauge of expectations for interest rates, dropped fourteen basis points, or 0.14 percentage point, to 11.46 percent at 3:48 p.m. in Sao Paulo, and were down 20 basis points this week. The real advanced 0.2 percent to 2.2739 per dollar.

Brazil’s seasonally-adjusted economic activity index fell 1.48 percent in June from the previous month, the central bank said in a report today, the biggest drop since May 2013. President Dilma Rousseff is struggling to revive Brazil’s faltering economy, which is forecast by analysts to grow at the slowest pace since 2009, two months ahead of elections.

“The drop in activity reinforces the perception of a slowdown in the economy during the second quarter,” Octavio de Barros, the chief economist at Banco Bradesco SA in Sao Paulo, wrote in an e-mailed research note to clients. “Trading in the swap rates futures market should reflect that today.”

Brazil’s real reversed earlier gains after a spokesman for Ukraine’s military said in Kiev that the country’s troops destroyed part of an armed convoy from Russia. The currency is up 0.9 percent this week.

Economic Contraction

Latin America’s biggest economy shrank 1.2 percent in the second quarter, according to calculations made by Bloomberg based on the central bank data. Today’s data doesn’t necessarily mean the economy contracted second quarter, central bank economic policy Director Carlos Hamilton told reporters in Sao Paulo today.

The national statistics institute is scheduled to publish official data on quarterly gross domestic product later this month.

Brazil’s retail sales in June fell the most in more than two years, surprising analysts who forecast an increase. Industrial output contracted for the fourth consecutive month as production of capital goods shrank.

To support the currency and limit import prices, the central bank sold swaps worth $198.9 million under an intervention program due to expire in December, and rolled over $493.4 million worth in contracts.

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