Bloomberg News

Brazil Rate Yields Plunge as Rousseff Signals Cuts; Real Drops

November 25, 2011

Nov. 24 (Bloomberg) -- Yields on most Brazilian interest- rate futures contracts plunged after President Dilma Rousseff said the country has room to use monetary policy to shore up economic growth.

Yields on the futures contract due in January 2013 fell 14 basis points, or 0.14 percentage point, to 9.76 percent, a record low. The real plunged 1.7 percent to 1.8980 per dollar, from 1.8662 yesterday. It earlier weakened past 1.90 for the first time since Oct. 4.

Traders stepped up bets that policy makers will accelerate the pace of rate cuts after Rousseff said at an event in Brasilia yesterday that Latin America’s biggest country can “use monetary policy” to combat the effects of Europe’s debt crisis. Brazil’s economy expanded at the slowest pace in 10 quarters in the three months through September, the Finance Ministry said yesterday.

“The market read these comments as the government will take advantage of the external crisis as an opportunity to push rates down,” Mauricio Junqueira, who helps oversee about $300 million at Squanto Investimentos in Sao Paulo, said in a telephone interview. The central bank’s thesis that “the external crisis could help slow the Brazilian economy is coming to pass,” he said.

Traders are wagering policy makers will reduce the benchmark rate by as much as 75 basis points to 10.75 percent at their Nov. 30 meeting, followed by about another 100 basis points of cuts by April, futures show. Central bankers lowered the rate 50 basis points in each of the past two meetings.

Two-Month Low

The real earlier touched a near two-month low of 1.9033 per dollar as investors unwound bets against the dollar because they hit their risk limits, Alfredo Barbutti, an economist at Liquidez DTVM Ltda in Sao Paulo, said in a telephone interview.

“You had a strong position of selling the dollar, very concentrated and selling the wrong way,” he said. “The events of this week are making the argument to be short the U.S. dollar disappear.”

U.S. lawmakers’ failure to reach an agreement to cut the nation’s budget deficit and Germany’s inability to get sufficient bids at a bond auction this week drove investors to dump higher-yielding assets in favor the dollar, Barbutti said.

Brazil’s gross domestic product grew 0.3 percent in the three months through September from the previous three months, according to an estimate given to Congress yesterday by the Finance Ministry in Brasilia. That’s equivalent to annualized growth of 1.2 percent.

Jobless Rate

The government is focused on guaranteeing sustainable growth, Rousseff said yesterday.

“We are alert to guarantee that, facing the crisis, our country uses the old and tired Chinese metaphor that a crisis is also an opportunity,” Rousseff said at an event in Brasilia.

Brazil’s October unemployment rate declined to a record low for the month as the labor market resisted the effects of a slowing economy. The jobless rate fell to 5.8 percent, the national statistics office said today in Rio de Janeiro. The median estimate of 38 analysts surveyed by Bloomberg was for a rate of 5.9 percent.

Average real wages fell 0.3 percent from a year ago to 1,612.70 ($868) a month, the report showed.

While joblessness fell from the previous month, declining salaries show the labor market is suffering from the effects of a slowing economy, Fabio Romao, an economist at Sao Paulo-based research firm LCA, said in a telephone interview.

“The labor market stopped improving, although it hasn’t clearly worsened,” he said.

--Editors: David Papadopoulos, Brendan Walsh

To contact the reporters on this story: Josue Leonel in Sao Paulo at jleonel@bloomberg.net; Gabrielle Coppola in New York at gcoppola@bloomberg.net

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


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