ForexSpace.com - Yields on Brazilian interest-rate futures rose after a report showed unemployment fell unexpectedly in April. The mild decline to 6 percent from 6.2 percent - the first time in three months – has taken many forex traders and brokers by surprise, not least because Brazil’s economic activity remains sluggish amid concerns about the ongoing European woes and wider stagnant economic growth.

Data supplied by the Brazilian Institute for Geography and Statistics (IBGE) shows how an uptick in hiring coupled to Brazilian companies no longer firing seasonal holiday workers lay behind the news. However, it should also be noted that a decline in average monthly salaries could foretell of tighter labor markets beginning to succumb to a slowdown in Latin America's largest economy. Moreover, according to Cimar Azeredo, who coordinates the IBGE survey, the April downturn wasn't significant enough to call an inflection point, "the [unemployment] rate normally starts to fall from this time of the year on."

While IBGE called the April decline "statistically insignificant," Brazil's unemployment rate typically reaches an inflection point in the second quarter of each year as hiring picks up with the end of the Southern Hemisphere country's summer season. Seasonal workers dismissed from year-end holiday and hospitality jobs during the first few months of the year also start to find new work.

Nonetheless, the news encouraged speculation that the country’s central bank will slow the pace of cuts in borrowing costs.  As Newton Rosa, chief economist at Sulamerica Investimentos in Sao Paulo explained: “This means worker income will stay at high levels and could keep pressure on prices of services, limiting the expected fall in inflation.”

The real dropped toward a three-year low after rising yesterday the most in seven months as the central bank auctioned currency swaps for the third day in a week to curb swings in the exchange rate. The yield on the Brazilian interest-rate futures contract due in January 2014 rose nine basis points, or 0.09 percentage point, to 8.43 percent at 9:44 a.m. in Sao Paulo. The yield touched a record low 8.05 percent on May 18. The real dropped 0.2 percent to 2.0363 per U.S. dollar after touching 2.1062 yesterday, the weakest level since May 2009, before appreciating 2.9 percent, the most since October.

Brazil’s central bank has reduced the benchmark Selic base interest rate to 9.0 percent, with expectations that additional rate cuts are on the way that will push the Selic below its all-time low of 8.75 percent. The bank has chopped interest rates from last year's 12.5 percent peak to counter any impact on Brazil's economy from overseas turmoil.

Drew Hillier. Editor