Brazil Swap Rates Tumble Most in Four Months on Dovish Goldfajn

  • Central bank in monetary statement eased up on hawkish tone
  • The real follows an emerging-market slump as commodities fall

Brazilian swaps fell the most in four months on increased bets that the key interest rate may be cut later this year as traders said the central bank eased up on its hawkish tone in a statement released late Wednesday.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, dropped 0.19 percentage point, to 12.59 percent Thursday in Sao Paulo. It was the steepest decline since April 13.

On Wednesday, the central bank’s board, led by President Ilan Goldfajn, unanimously voted to maintain benchmark borrowing costs at a 10-year high of 14.25 percent. Instead of stating that there’s “no room” for monetary policy easing, as in previous statements, the board argued that the loosening of monetary conditions will depend on indications of whether inflation targets can be met in the future. While the board cautioned that consumer-price increases may remain higher than expected in the short term, it added that the recession and fiscal-austerity measures could eventually take pressure off of prices.

"Traders interpreted that these changes suggest an increased likelihood of cuts in the near term," said Camila Abdelmalack, the chief economist at CM Capital Markets in Sao Paulo. "We forecast that the first cut from the central bank will come in November and investors are calibrating expectations regarding the size of the adjustment."

The real dropped along with emerging markets currencies worldwide, which followed commodities prices lower. A gauge of commodities tracked by Bloomberg fell 0.8 percent as oil erased gains to trade down 2.6 percent. 

The currency weakened 0.9 percent to 3.2573 per dollar. In Brazil, foreign investors’ net long position in the U.S. dollar has declined for four straight days to reach the lowest level since April 29, according to data from BM&FBovespa.

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