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Yields on Brazilian interest-rate futures contracts dropped for a third day on speculation the European debt crisis will prompt policy makers to make deeper cuts to the benchmark rate at the two-day monetary policy meeting beginning today.
Traders are anticipating central bank President Alexandre Tombini will reduce the 9 percent target rate by 50 basis points, or 0.50 percentage point, and to as low as 8 percent by the end of August, according to rate futures yields.
“The deterioration abroad could give a more dovish tone to the Copom meeting” Andre Perfeito, the chief economist at Sao Paulo-based Gradual Investimentos, said in a telephone interview, referring to the monetary policy committee. Financial turmoil abroad is provoking a “strong deceleration” in the Brazilian economy, said Perfeito, who expects Tombini to reduce the Selic rate by 75 basis points this week.
Yields on the futures contract due in January 2014 fell 11 basis points, or 0.11 percentage point, to 8.39 percent at 11:27 a.m. in Sao Paulo. The real depreciated 0.7 percent to 1.9944 per U.S. dollar after touching 2.1062 on May 23, the weakest level since May 2009.
President Dilma Rousseff is concerned Spain’s crisis may undermine investment in the Latin American country and will discuss the matter in a meeting with King Juan Carlos next week, Valor Economico reported, citing an unidentified government official. An official at the Ministry of Foreign Relations in Brasilia didn’t immediately return a call seeking comment.
Brazil’s real was the worst performer among 16 major currencies tracked by Bloomberg, snapping four days of gains that came as the central bank auctioned currency swaps last week to curb the currency’s decline. The real has lost 4.3 percent this month, after weakening by the same amount in April.
Concern Europe’s debt crisis is worsening overshadowed speculation the central bank will auction more swaps to limit the real’s losses, Perfeito said.
“If there were a brutal deterioration in the external environment, the real could go to 2.3 per dollar,” he said.
The swap sales are a reversal from last month’s policy of stepped-up dollar purchases aimed at weakening the real to help exporters. Policy makers bought $7.2 billion in the spot market in April, the most since purchases of $8.4 billion in March 2011.
The central bank has lowered Brazil’s target lending rate by 3.5 percentage points since Aug. 31 to 9 percent, the biggest reduction among the world’s 25 largest economies, according to data compiled by Bloomberg.
Latin America’s largest economy probably expanded 1.3 percent in the first quarter from a year earlier, according to the median forecast of 37 economists surveyed by Bloomberg News, down from 1.4 percent growth in the last three months of 2011.
Analysts expect industrial production was unchanged in April from the prior month following a 0.5 percent contraction in the prior month, according to the median estimate of 40 economists surveyed by Bloomberg News before the May 31 report.
“We are facing an escalation of the international crisis,” Finance Minister Guido Mantega told reporters in Brasilia last week. “This demands that we redouble our efforts to maintain economic growth at a reasonable rate.”
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