Brazil Swaps Show Traders Boosting Wagers on Interest-Rate Cuts

  • Real rises amid news that government pushing for reforms
  • Swaps show wagers on rate cut to as low as 13.75% tonight

Traders stepped up bets on interest-rate reductions in Brazil ahead of a meeting tonight at which policy makers are forecast to cut borrowing costs for the first time since 2012.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, dropped 0.07 percentage point to 11.92 percent Wednesday in Sao Paulo, reaching the lowest since November 2014. Brazil’s real rose 0.6 percent to 3.1690 per dollar.

Investors are pricing in a reduction in borrowing costs of between 0.25 and 0.5 percentage point, betting that slowing inflation means the central bank has room to reduce interest rates in an effort to bolster growth. Even as Brazil sunk into its deepest contraction in over a century, policy makers have stuck with one of the highest benchmark rates among G-20 nations at 14.25 percent.

"Traders are focusing on the size of the tightening cycle, rather than on the initial step," said Luiz Eduardo Portella, a treasurer at Modal Asset Management in Rio de Janeiro.

Annual inflation in the 12 months through September was 8.48 percent, well above the bank’s target of 4.5 percent, but down from as high as 10.71 percent earlier this year. Monthly inflation was the slowest in more than two years. The bank’s latest survey of economists shows inflation expectations of about 5 percent by the end of 2017.

The real gained after O Globo reported that the government will push for Congress to vote on changes to the pension system before the Carnival holiday next February. Traders are also anticipating a surge in dollars coming into Brazil as the deadline approaches for a program that encourages citizens to regularize undeclared overseas funds.

"Expectation of inflows due to the repatriation bill and signs that the government is focusing on expediting fiscal adjustment measures help give a certain resilience to Brazilian assets," said Ricardo Gomes da Silva, the foreign-exchange trading head at brokerage Correparti, in Curitiba. "Brazilian assets are poised to outperform peers in the short term."

— With assistance by Bruce Douglas, and Mario Sergio Lima

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