Brazil’s Real Falls to 8-Week Low Before Swaps Rollover Decision

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The real slid to an eight-week low as traders awaited the Brazilian central bank’s decision on the June rollover of swaps supporting the currency and looked ahead to a report forecast to show the economy shrank.

Brazil extended the maturity on 8,100 foreign-exchange swap contracts each day this month, compared with 10,600 in April following the halt of sales. The currency’s 16 percent decline this year is the worst performance in emerging markets, adding to inflation pressure by making imports more expensive.

“If the central bank diminishes the rollover of the swaps at a time when it’s worried about inflation -- and a strong dollar is inflationary -- the selling pressures on the real will be amplified,” Joao Paulo de Gracia Correa, a trader at Correparti Corretora de Cambio in Curitiba, Brazil, said by telephone. “We should see high volatility with the currency.”

The real depreciated 0.7 percent to 3.1628 per U.S. dollar at the close of trade in Sao Paulo, the weakest level on a closing basis since March 31. The drop this month was extended to 4.7 percent.

Morgan Stanley said Wednesday in a research note to clients that the amount of currency swaps that the central bank will allow to expire will probably be close to the lower end of the expected range of $2 billion to $4 billion. Brazil extended the maturity on contracts worth $394.9 million Thursday.

Concern that Latin America’s largest economy is stalled and speculation that Brazil’s budget deficits will lead to a credit rating downgrade weighed on the currency in May.

GDP Outlook

Gross domestic product contracted 0.5 percent in the first quarter, according to the median forecast of economists surveyed by Bloomberg before Friday’s report from the national statistics agency.

President Dilma Rousseff’s administration did achieve a legislative breakthrough this week in its effort to shore up public accounts. The Senate voted to limit sick leave and pension payments, approved an increase in import taxes and passed a bill reducing unemployment benefits. The measures may save the government an estimated 15.7 billion reais ($4.9 billion) a year.

Swap rates on the contract maturing in January 2017, a gauge of expectations for changes in borrowing costs, declined 0.05 percentage point to 13.28 percent.

The central bank is projected to increase the benchmark lending rate by another half-percentage point next month after inflation accelerated in April to 8.17 percent, above the official 4.5 percent target.

One-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, remained the highest among 16 major currencies tracked by Bloomberg.