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Brazil Future Yields Fall as Policy Makers Signal More Rate Cuts

June 08, 2012

Yields on Brazilian interest-rate futures declined for a second week after the central bank reiterated language in its meeting minutes that encouraged speculation it will maintain the pace of rate reductions.

Minutes released today were “quite similar” to those from the previous meeting, indicating policy makers will repeat at their next meeting the half-percentage point cut implemented on May 30, according to Italo Lombardi, economist at Standard Chartered Bank.

“In July there will be another 50 basis point cut or possibly more,” Lombardi said in a phone interview from New York. “It will depend on the economy’s performance and how things develop abroad.”

The yield on the interest-rate futures contract due in January 2014 declined 14 basis points, or 0.14 percentage point, to 8.14. The yields fell nine basis points this week. The real rose 0.5 percent to 2.0237 per U.S. dollar, erasing an earlier decline. The currency extended its weekly gain to 0.8 percent as the central bank sold swaps to support the currency.

The economic recovery has been slower than anticipated, the central bank said in minutes of its May 29-30 meeting, when it lowered the target lending rate to a record low 8.5 percent. Inflation risk remains limited as the global economy remains “disinflationary,” according to policy makers. The bank said it will carry out any further reductions of borrowing costs with “parsimony,” echoing minutes of its April meeting.

‘Confidence of Investors’

“The central bank doesn’t want to be alarmist and affect the confidence of Brazilian businesses by signaling a cut of 75 basis points,” Andre Perfeito, chief economist at Gradual Investmentos, said in a phone interview from Sao Paulo. “Clearly the bank is concerned about the confidence of investors.”

The real rebounded as the central bank said it sold 20,400 of 30,000 currency swap contracts for a total $1.01 billion in an auction today, the seventh day of such operations to support the exchange rate since mid-May. The bank sold 11,200 contracts due July and 9,200 due August.

The swaps are a reversal of the bank’s stepped-up dollar purchases, which reached $7.2 billion in April, the most in 13 months, to bolster exports by weakening the currency. The real is the worst performer against the greenback this year among 25 emerging-market counterparts tracked by Bloomberg, having weakened 7.8 percent.

“The bank stepped in today even amid lower volatility and no major event in the market,” said Bernd Berg, emerging markets currency strategist for Credit Suisse AG (CSGN), said in a phone interview from Zurich. “Perhaps they are targeting a range for the real between 2 and 2.05 per dollar, to bring volatility to an even lower level.”

External Environment

European stocks retreated, paring the Stoxx Europe 600 Index’s (SXXP) biggest weekly gain in four months, after German exports slumped more than forecast and Fitch Ratings cut Spain’s credit rating.

“The investor knows that the foreign environment is bad, but also knows that the currency market is being watched by the central bank,” Jose Carlos Amado, currency trader at Renascenca DTVM Ltda., said in a telephone interview from Sao Paulo.

Annual inflation slowed in May to 4.99 percent from 5.10 percent in the previous month, the government’s statistics agency said June 6. The median forecast of economists in a Bloomberg News survey was for a reading of 5.06 percent.

Growth Forecast

Economists trimmed their 2012 economic growth forecast to 2.72 percent from 2.99 percent a week earlier, according to the median forecast in a weekly central bank survey of about 100 analysts published June 4. They cut their outlook for inflation this year to 5.15 percent from 5.17 percent. The rate has remained above the country’s 4.5 percent target for 21 months.

Speculation that President Dilma Rousseff will fuel inflation by reducing the primary budget surplus, which excludes interest payments on debt, eased after Valor Economico reported that she had scrapped possible changes to the target.

Treasury Secretary Arno Augustin told reporters in Brasilia May 30 that the government hasn’t considered changing the primary surplus target. A Finance Ministry press official declined to comment today when contacted by Bloomberg News.

To contact the reporters on this story: Josue Leonel in Sao Paulo at; Blake Schmidt in Bogota at

To contact the editor responsible for this story: David Papadopoulos at

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