Aug. 4 (Bloomberg) -- As Brazilian President Dilma Rousseff declines in voter polls, economists get less pessimistic on the outlook for the nation’s currency.
Over the course of July, the median year-end forecast for the real rose to 2.35 per dollar from 2.40, according to data compiled by Bloomberg. While that would still represent a drop from 2.2577 last week, the improved sentiment coincided with polls showing Rousseff’s lead narrowing before the October election as inflation quickens and economic growth slows.
Under Rousseff, Latin America’s biggest economy has expanded at the slowest pace since President Fernando Collor stepped down in 1992. Nomura Holdings Inc. estimates a 70 percent chance of an opposition victory, up from 60 percent on June 11, and Bank of America Corp. sees the real extending gains should the administration change.
“If the market assigns a higher likelihood of Dilma losing, that’s good for the real,” Ezequiel Aguirre, a strategist at Bank of America in New York, said by phone.
The real has rallied 4.6 percent this year, leading gains among the 16 most-traded currencies tracked by Bloomberg, as the central bank intervened in the foreign-exchange market to bolster the exchange rate.
The gains contrast with data showing an economic slump, including a report Aug. 1 that Brazil’s industrial production dropped for the fourth straight month in June, falling 1.4 percent. Revisions showed it contracted 0.8 percent in May, more than originally reported.
Gross domestic product expanded 0.2 percent in the first quarter, half the pace of the prior three months as family consumption contracted.
Rousseff’s lead over candidate Aecio Neves in a possible second round of October’s presidential election dropped to eight percentage points on July 22 from 13 percentage points in June, according to Ibope polls published by O Estado de Sao Paulo newspaper. The most recent survey of 2,002 people had a margin of error of plus or minus 2 percentage points. A Sensus poll released July 18 showed the candidates tied in a runoff vote.
“The story has been changing,” Benoit Anne, the head of emerging-market strategy at Societe Generale SA in London, said by phone. “The election is a closer call and that’s introducing a different variable that we hadn’t anticipated.”
A press officer at Rousseff’s campaign headquarters declined to comment on forecasts showing economists less pessimistic about the real after recent voter polls.
The real fell less than 0.1 percent to 2.2584 per dollar today.
Last month’s increase in real forecasts to 2.35 per dollar followed no change in June. At one point in March, economists foresaw the currency weakening to 2.5, according to data compiled by Bloomberg. Now, the median year-end prediction has fallen back to 2.4.
As growth has decelerated, the central bank has tried to keep the real from weakening and further stoking inflation by selling foreign-exchange swaps. Annual inflation, which hasn’t slowed to the 4.5 percent center of the central bank’s target range since Rousseff took office in January 2011, accelerated to 6.51 percent in mid-July.
Brazil’s international reserves and the central bank’s currency intervention have been successful in protecting the real, Rousseff said in a July 30 speech at an event hosted by the National Industry Confederation. In June, the bank extended its swap program through at least December.
Neves said in the same industry event that a weaker currency seems essential to help boost domestic output.
“It’s yet to be seen if direct intervention in the real would continue with a new administration,” Alejandro Cuadrado, the chief Latin America currency strategist at Banco Bilbao Vizcaya Argentaria SA in New York, said by phone.
The International Monetary Fund said policy makers shouldn’t shore up the real as the economy stalls and inflation accelerates. Currency intervention is useful for calming sudden shifts in capital flows, “but should not be used to resist currency pressures that reflect changes in fundamentals,” IMF economists wrote in a research report published July 29.
The real has depreciated since Rousseff took office, from as strong as 1.5290 in July 2011 to as weak as 2.4549 in August 2013. The 2011 level was its strongest since 1999 and contributed to a slowdown in growth as exports became less competitive.
GDP will expand 1.3 percent this year, according to the median estimate of almost 40 economists surveyed by Bloomberg. That compares with 2.49 percent for the global economy.
If the opposition wins the election, the real will strengthen initially, Citigroup Inc. strategists wrote in a July 30 note to clients.
“It would boost business confidence and expectations of improved fundamentals and fiscal stance and would justify a stronger currency,” they said.
Standard & Poor’s cut Brazil’s sovereign credit rating one step in March to BBB-, the lowest level of investment grade, citing sluggish growth and expansionary fiscal policies. Brazil has posted a primary budget deficit for two straight months as policy makers struggled to fortify fiscal accounts during an economic slowdown.
The real has the potential to rally to 2.2 per dollar if Rousseff is voted out of office, according to Christian Lawrence, a currency strategist at Rabobank.
“Our base case is that Neves wins and that we see capital inflows into Brazil from international markets,” Lawrence said in a phone interview from New York. “We don’t expect inflows if Dilma Rousseff wins.”
To contact the reporter on this story: Sebastian Boyd in Santiago at email@example.com