Brazil real posts worst weekly rout in two months on Fed outlook

Brazil’s real declined for a fifth day as concern the Federal Reserve will reduce stimulus overshadowed the central bank’s plan to begin rolling over more than $5 billion in currency swap contracts today.

The real fell 0.6% to 2.3538 per dollar at 10:32 a.m. in Sao Paulo, the worst performance among major emerging- market currencies today. The real has lost 3.4% this week, the most since the five days ended June 21. Swap rates on the contract due in January 2015 rose three basis points, or 0.03 percentage point, to 10.09%.

The 13% decline in Brazil’s real this year is raising the cost of imports and adding to inflation that’s already above targets, prompting policy makers to sell currency swaps in a bid to limit losses. Their efforts have been overwhelmed by concern that Brazil’s economy is slumping and speculation that Fed Chairman Ben S. Bernanke will pare stimulus in the U.S. later this year as signs mount that unemployment is easing in the world’s largest economy.

“This is innocuous, the central bank has to do more,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimentos, said by phone from Sao Paulo. “Brazil is suffering more than other countries.”

The rollover of 100,800 contracts due Sept. 2 will begin today, the central bank said in a statement posted on its website yesterday. Policy makers will continue to intervene in the currency futures market, the bank said. The central bank auctioned 20,000 currency swap contracts at 10:30 a.m. today local time.

Growth Outlook

Economic activity, a proxy for gross domestic product in Latin America’s largest economy, rose 2.35% in June from a year earlier, according to a central bank report yesterday, trailing the median forecast of economists surveyed by Bloomberg for a gain of 2.70%. Gross domestic product will expand 2.21% this year, down from the previous week’s estimates of 2.24%, according to an Aug. 9 central bank survey of about 100 analysts.

JPMorgan cut its forecast for Brazil’s economic growth in 2014 to 2.4% from 2.7%, according to a research report yesterday.

Brazil’s real should depreciate to 2.4 per dollar in six months and 2.45 in the next 12 months, Barclays Plc economists Guilherme Loureiro and Marcelo Salomon wrote in a report today.

“We have been concerned that the deterioration of Brazilian fundamentals, which in our base case scenario will lead to a sovereign credit downgrade in the first quarter of 2014, would pressure the real as we moved through the second half of 2013,” the economists wrote. “The selloff came faster than we expected.”

Swap Rates

Swap rates on the January 2015 contract have surged 48 basis points this week, the biggest weekly increase since June 21, as the real’s drop fueled inflation concern and the prospect of reduced stimulus drove up rates globally.

Brazilian inflation will probably accelerate this month, and the real’s decline is undoubtedly fueling price increases, Carlos Hamilton, the central bank’s economic policy director, said at an event in Belem on Aug. 12.

Annual inflation in July eased to 6.27%, the slowest pace since January, after breaching the upper limit of the central bank’s target range in March and June. Officials target an annual rate of 4.5%, plus or minus two percentage points.

Policy makers in July raised the Selic by 50 basis points to 8.50% after increases of 50 and 25 basis points in May and April, respectively. The central bank board at its Aug. 27-28 meeting will raise borrowing costs by an additional 50 basis points, swaps trading shows.

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