Real Drops against USD, Brazil Swap Rates Soar Higher as Central Bank Keeps the Borrowing Costs Low

Swap rates of Brazil soared higher amid concerns that the inflation in the country will accelerate further because of the decision of Central Bank to keep the borrowing costs at a record low of 7.25%. Swap rates on those contracts scheduled in January 2014 surged by 3 basis points and are at 7.32% currently. The major currency of Brazil, Real however plummeted by 0.3% and is for the first time since 23rd November, under the 2.1 mark. It is currently priced at 2.1031 per USD. Real has been traded within the range of 2 to 2.1 from 4th July to 21st November and then touched a 3 year low on 23rd November. Incidentally, on 23rd November, the policy makers of this Latin American country decided to sell around 32500 contracts which were due by end of 2012, a total worth of $1.6 billion to help move Real up.

The Central Bank of Brazil is trying hard to keep the country’s inflation within the range of 2.5% to 6.5%. They, however, don’t want to cause any problem in Brazil’s economic recovery and hence has decided to keep a hold on the current target lending rate. According to the Senior Economist at Espirito Santo Investment Bank, Flavio Serrano, people will actually charge more of an inflation premium as the markets outside Brazil are getting stronger.

Andre de Carvalho Ferreira stated that the market is speculative currently and because of the companies’ remittances, most of the investors in the market are buying dollars. This is hurting Real further. As most of the Brazilian companies operate in USDs, any sort of decline in Real, hurts them the most. Incidentally, Carvalho Ferreira is the Director of Futura Corretora.

IPCA-15 index, measurement of the consumer prices in Brazil has surged by 5.64% till the mid-November. The report was published by The National Statistics Institute. According to a recent survey done by the economists of Central Bank, the inflation will be around 4.5% by the middle of 2013. On the other hand, the consumer default rate is still at 7.9% and this is happening for the 4th straight month now. The default company loan rate surged by 4.1% in comparison to that of 4%, as it was on October.