Brazil Real Posts Second Weekly Decline on Global Growth Concern

Brazil’s real posted a second straight weekly drop amid concern Europe’s deepening debt crisis will reduce global growth, curbing demand for higher-yielding assets in emerging markets.

The currency fell 0.2 percent to 2.0665 per U.S. dollar at 5:15 p.m. in Sao Paulo, extending its decline this week to 0.8 percent. The yield on interest-rate futures contract due in January 2014 was unchanged at 8.05 percent today, leaving it down 4 basis points, or 0.04 percentage point, this week.

“The currency is still vulnerable to spikes in risk aversion,” Vladimir Caramaschi, chief economist of Credit Agricole SA’s Brazilian unit, said by phone from Sao Paulo. “Some people were expecting a little more from the Fed and in Europe, nothing is solved, so the feeling about the real is not good.”

On June 20, the U.S. Federal Reserve cut its estimates for growth amid a slowdown in hiring and extended its stimulus program known as Operation Twist, disappointing investors anticipating a more aggressive approach.

Data yesterday showed euro-area manufacturing shrank at the fastest pace in three years and U.S. reports pointed to a slowdown in the world’s largest economy, fueling concern that demand for exports from developing nations will slow. Manufacturing in China, Asia’s biggest economy, may shrink for an eighth month in June, according to preliminary data released yesterday.

“China concerns continue to be another source for the increase in risk aversion that we’ve seen, and it’s very important for Brazil,” Caramaschi said.

Rate Cuts

Brazil’s government said yesterday that prices rose 0.18 percent in the month through mid-June, less than every estimate in a Bloomberg survey of 42 analysts and pushing down the annual inflation rate for a ninth straight month.

Policy makers led by central bank President Alexandre Tombini have reduced the key overnight interest rate by 4 percentage points since August, the most among Group of 20 nations, to a record low 8.5 percent. The government has also cut taxes on consumer and industrial goods and boosted low-cost loans by state development bank BNDES to revive growth that slowed to 2.7 percent last year from 7.5 percent in 2010.

Economists lowered their growth estimate for a sixth straight week, to 2.3 percent, according to a weekly central bank survey of about 100 analysts released June 18.

Capital Economics Ltd. lowered its forecast to 1.7 percent this year, according to an e-mailed report today by economist Neil Shearing. Inflation is likely to reach the central bank’s 4.5 percent target by the end of this year, according to the report.

“The winds abroad aren’t favorable and are contributing to the fall in rate expectations,” said Solange Srour, chief economist at BNY Mellon ARX, in a phone interview from Rio de Janeiro. “In a scenario in which the world grows less, inflation isn’t as much of a concern as it was thought to be. We’re expecting the benchmark Selic to fall to 7 percent now.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE