Bloomberg News

Brazil’s Rate Futures, Real Cap Weekly Drop on Growth Outlook

June 10, 2011

June 10 (Bloomberg) -- Yields on Brazilian interest-rate futures contracts fell and the real posted its first weekly drop in four as an unexpected decline in retail sales added to speculation economic growth is slowing.

Yields on the contract due in January 2013 retreated two basis points, or 0.02 percentage point, to 12.47 percent at 5:04 p.m. New York time, capping a third straight weekly fall. The real weakened 0.9 percent today to 1.5970 per dollar, from 1.5832 yesterday, and is down 1.3 percent since June 3.

Sales fell 0.2 percent in April from March, from a revised 1 percent increase the previous month, the national statistics agency said today in Rio de Janeiro. The median forecast from 30 economists surveyed by Bloomberg was for sales to increase 0.4 percent. The data indicate the central bank’s four interest rate increases this year are stemming inflation, said Andre Perfeito, chief economist at Sao Paulo-based Gradual Investimentos.

“Inflation is showing all signs that it’s a lot softer than we used to believe two weeks ago, three weeks ago,” Perfeito said by phone. “The real economic data like retail sales and industrial production are showing that we’re not growing as fast as a few months ago.”

Industrial production slumped 2.1 percent in April from March, the biggest contraction since 2008, and consumer confidence fell in May to its lowest level in more than a year. Retail sales rose 10 percent in April from the same month a year earlier, the statistics agency said.

Benchmark Rate

Central bankers raised the benchmark lending rate 25 basis points this week to 12.25 percent, keeping a pledge to raise borrowing costs for a “sufficiently long period” to bring inflation back to its target in 2012, according to a statement accompanying its June 8 decision.

Policy makers also put so-called macro-prudential measures in place in December to curb credit growth and help tame inflation. President Dilma Rousseff’s government is also trying to prevent Latin America’s biggest economy from overheating by reducing spending.

Annual inflation through May accelerated to 6.55 percent, according to national statistics agency. The central bank targets inflation at 4.5 percent, plus or minus 2 percentage points.

The retail sales data suggest policy makers will rely more on macro-prudential measures to curb credit and not increase rates any more this year, Perfeito said.

Traders anticipate Tombini may stop raising the benchmark interest rate as soon as August, after increasing it 25 basis points in July, yields on the futures contracts show.

Currency Drop

The real weakened as investors shunned higher-yielding assets a growing concern the global economy is slowing after China reported a small-than-estimated trade surplus today and Federal Reserve Vice Chairman Janet Yellen said yesterday the U.S. housing market will undergo a “long, drawn-out recovery.”

Eighteen of 25 major emerging market currencies tracked by Bloomberg declined against the U.S. currency. The Dollar Index, which tracks the international value of the greenback, gained 0.9 percent.

“Today is clearly a risk off trading environment,” Mauricio Junqueira, who helps manage $300 million at Squanto Investimentos, said in a telephone interview from Sao Paulo.

German Finance Minister Wolfgang Schaeuble said bondholders should assume a “fair” share of further Greek aid, a day after European Central Bank President Jean-Claude Trichet rejected any direct ECB participation in a second Greek bailout.

‘Uncertainties’

The European debt crisis along with concern that global growth is slowing drove the real’s decline for the week, Deives Ribeiro, a currency manager at Fair Corretora de Cambio e Valores, said in a telephone interview from Sao Paulo.

“The uncertainties are still out there,” Ribeiro said. “Greece has returned to the scene with uncertainty over the help plan.”

Policy makers said they bought U.S. dollars in the spot market today at 1.5971 reais each. The central bank uses the tactic to try to curb appreciation in the real, which has strengthened 22 percent in the past two years, the most in emerging markets tracked by Bloomberg.

--With assistance from Matthew Bristow and Andre Soliani in Brasilia, Alexander Ragir in Rio de Janeiro and Stephen Kirkland in London. Editors: Brendan Walsh, Richard Richtmyer

To contact the reporters on this story: Josue Leonel in Sao Paulo at jleonel@bloomberg.net; Benjamin Bain in New York at bbain2@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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