Brazilian interest-rate futures contract yields rose the most in 18 months as government measures to stimulate car lending fueled speculation the central bank will slow the pace of cuts in borrowing costs.
The real fell to a new three-year low after briefly erasing its decline as the central bank sold currency swap contracts for the second time in three trading sessions, holding two auctions today. New rules announced yesterday will free as much as 18 billion reais ($8.8 billion) for auto financing to revive Latin America’s biggest economy.
“The measures will not revive the economy to the point that the central bank will have to reverse its rate cuts, but they reinforce the idea that the bank will make more moderate reductions,” Newton Rosa, chief economist at SulAmerica Investimentos, said by phone from Sao Paulo.
The yield on the futures contract due in January 2014 increased 25 basis points, or 0.25 percentage point, to 8.44 percent at 6 p.m. in Sao Paulo for the biggest increase since November 2010. The real fell 2.3 percent to 2.0907 per dollar.
Brazil’s central bank said in statements today it sold 30,300 out of 49,400 currency swap contracts at an auction and 13,600 out of 19,100 currency swap contracts in a second offering. The real pared its drop after touching a three-year low on May 18 as the central bank found buyers for all of the 13,000 swap contracts offered.
The central bank may be targeting an exchange rate rather than just “volatility” in the market, according to Ilan Solot, a London-based strategist at Brown Brothers Harriman & Co.
“Today’s move seems to point in that direction, and if that’s the case, that’s a big deal,” he said by phone. “It could generally change the psychology of the market.
The swaps auctions indicate ‘‘2.05 is where they’re comfortable and maybe they’ll get to the point of drawing a line in the sand at this level,” Solot said.
The exchange rate is “worrying” for importers and positive for companies that export, Brazil’s Trade Minister Fernando Pimentel told reporters today in Brasilia. “It is beginning to be attractive again to export cars,” he said.
Brazil’s consumer prices as measured by the IPCA-15 index rose 0.51 percent in the month through mid-May, the national statistics agency said. Economists had expected an increase of 0.56 percent, according to the median of 45 estimates in a Bloomberg News survey.
The seasonally adjusted economic activity index, a proxy for gross domestic product, fell for a third month in March, dropping 0.35 percent, the central bank said May 18.
Analysts expect GDP to expand 3.09 percent in 2012, compared with 3.20 percent a week earlier, according to the median estimate in a central bank survey published yesterday.
Brazil’s currency dropped last week past 2 per dollar for the first time since 2009 after the central bank purchased dollars to keep it weak and cut borrowing costs. The real extended its decline today on concern Greece was making preparations to exit the euro.
“We are facing an escalation of the international crisis,” Finance Minister Guido Mantega told reporters in Brasilia yesterday. “This demands that we redouble our efforts to maintain economic growth at a reasonable rate.”
The central bank has reduced Brazil’s target lending rate by 3.5 percentage points since Aug. 31 to 9 percent, the most among the world’s 25 largest economies, according to data compiled by Bloomberg. Policy makers may reduce the benchmark by 50 basis points to 8.5 percent at next week’s monetary policy meeting, trading in interest-rate futures shows.
The bank bought $7.2 billion in the spot market last month, the most since $8.4 billion purchased in March 2011, to help exporters by keeping the real weak.
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