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Brazil Real Weakens a Third Day as Fed’s Inaction Spurs Commodity Decline

Brazil’s real fell to a two-week low after data showed Latin America’s largest economy shrank for a third month in October.

The real declined for a third day, falling 0.4 percent to 1.8716 per dollar at 4:32 p.m. in Sao Paulo, from 1.8638 yesterday. The currency weakened as far as 1.8848, the lowest since Nov. 25. Yields on the interest-rate futures contract due in January 2013 rose three basis points, or 0.03 percentage point, to 9.9 percent.

Brazil’s seasonally adjusted economic activity, a proxy for gross domestic product, fell 0.32 percent in October from the previous month, capping its longest contraction since the bankruptcy of Lehman Brothers Holdings Inc. in 2008, according to central bank data. The real fell along with other currencies of commodity-exporting countries such as the Australian dollar and South African rand after the Federal Reserve dashed some investors’ expectations yesterday for monetary easing.

“Retail and industrial figures were already signaling a bad picture for economic activity,” Andre Perfeito, chief economist at Sao Paulo-based Gradual Investimentos, said in a telephone interview.

Global stocks and commodities tumbled today after Handelsblatt newspaper reported that German- and French-led plans to amend European Union rules and create closer fiscal union face misgivings from the European Commission and potentially from some of the 26 member states that agreed to the changes.

Economic Data

The decline in Brazil’s economic activity index was more than the median forecast of a 0.10 percent contraction from 27 analysts surveyed by Bloomberg. The data followed the statistics agency’s report yesterday that showed retail sales growth stalled in October.

Yields on rate futures increased amid speculation that the economic slowdown may prompt policy makers to take additional measures to revive growth, preventing inflation from slowing toward the government’s target.

Since August, President Dilma Rousseff’s administration has cut the benchmark interest rate three times, slashed taxes on consumer goods from pasta to refrigerators and eased curbs on credit to shore up the economy. Central bank President Alexandre Tombini has trimmed benchmark borrowing costs 1.5 percentage points to 11 percent.

“The scenario abroad is worse, but here the government is taking steps to stimulate the economy,” Ures Folchini, head of fixed-income at Banco West LB do Brasil SA in Sao Paulo, said in a telephone interview. “Even with the slowdown of the economy, inflation isn’t falling.”

Annual Inflation

Consumer prices, as measured by the IPCA index, rose 0.52 percent in November, compared with a 0.43 percent increase in October, the national statistics agency said Dec. 8. Compared with a year earlier, prices increased 6.64 percent, remaining above the upper limit of the central bank’s target range for an eighth month.

The central bank targets inflation of 4.5 percent, plus or minus two percentage points. Inflation has exceeded the upper limit of the target range since April.

Traders are betting the central bank will cut borrowing costs 0.50 percentage point to 10.5 percent at its January policy meeting, and to 9.75 percent by May, according to Bloomberg estimates based on interest rate futures.

Concern that Europe’s debt crisis is weakening global growth and hurting demand for Brazilian exports such as iron ore and sugar helped spark the real’s decline today, said Alfredo Barbutti, an economist at Liquidez DTVM Ltda in Sao Paulo.

“It’s a spiral of depreciating currencies,” Barbutti said in a telephone interview. “If things abroad get worse, demand for Brazilian assets will fall.”

To contact the reporters on this story: {Josue Leonel} in Sao Paulo at jleonel@bloomberg.net; {Gabrielle Coppola} in Sao Paulo at gcoppola@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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