Brazil’s Real Climbs From Nine-Year Low as Risk Demand Revives

Updated on

Brazil’s real rose from a nine-year low as German investor confidence advanced and Japan delayed a planned sales tax increase, adding to demand for higher-yielding assets in emerging markets.

The currency climbed for the first time in six days, gaining 1 percent to 2.5828 per dollar at the close of trade in Sao Paulo, and was the biggest gainer among 31 major currencies tracked by Bloomberg. Swap rates, a gauge of expectations for changes in borrowing costs, fell 0.11 percentage point to 12.65 percent on the contract maturing in January 2017.

“Europe and Japan are taking measures to improve the economy, which is positive for the real amid a boost in demand for riskier assets,” Camila Abdelmalack, an economist at brokerage CM Capital Markets, said by telephone from Sao Paulo. “We have no positive news in Brazil, though, and this move could be short-lived.”

One-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, is the highest among major currencies after the Russian ruble. The real fell yesterday on speculation that President Dilma Rousseff’s administration will struggle to restore growth amid allegations of corruption at Petroleo Brasileiro SA. The state-run oil company delayed a quarterly earnings report last week and yesterday cut its 2014 output growth target.

Rousseff told reporters over the weekend at the summit of Group of 20 nations in Brisbane, Australia, that Brazil will cut public spending that doesn’t support domestic consumption or investment to meet its fiscal target next year.

Mantega Replacement

She declined to comment on a replacement for Finance Minister Guido Mantega, who told reporters he is stepping down for personal reasons and isn’t being fired. He said that he doesn’t expect radical changes during Rousseff’s second term.

To support the currency, Brazil sold the equivalent of $196.3 million of foreign-exchange swaps today as part of an intervention begun last year and rolled over contracts worth $677 million.

Brazil’s central bank could recalibrate monetary policy to ensure a benign inflation outlook in coming years, the institution’s economic policy director, Carlos Hamilton, said today.

“The central bank policy committee won’t be complacent about inflation,” he said today at an event in Florianopolis. “If necessary, at the right time, the committee may recalibrate its monetary policy action to ensure the prevalence of a benign outlook for inflation in future years.”

Annual inflation in October slowed to 6.59 percent, still above the top of the central bank’s target range of 2.5 percent to 6.5 percent.

The real rose today along with most other emerging-market currencies as an index of investor and analyst expectations for Germany increased to 11.5 in November from minus 3.6 in the prior month. Economists had forecast an advance to 0.5, according to the median of 37 estimates in a Bloomberg survey.

In Japan, Prime Minister Shinzo Abe called for an early election as he sought to extend his term and salvage his policies after the country slipped into recession. He also delayed for 18 months a second planned sales-tax increase after the first installment in April led consumer spending to stagnate and the economy to contract for two straight quarters.

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