Brazil’s real advanced to a one-week high as President Dilma Rousseff affirmed a commitment to do what it takes to meet fiscal targets, fueling speculation that the nation will be able to avoid a junk credit rating.
The currency climbed for a third straight day, appreciating 1 percent to 3.1649 per U.S. dollar at the close of trade in Sao Paulo after gaining 2 percent. One-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, was the highest among 16 major currencies.
The real rallied after Rousseff said in an interview Tuesday at the presidential palace in Brasilia that narrowing the budget gap will help boost confidence in the economy. She commented as record budget deficits, stalled growth and allegations of corruption at the state-controlled oil company pushed the currency down 17 percent in the first quarter, the biggest drop since 2008.
“All eyes are on the fiscal situation, and Rousseff’s comments were very positive,” Joao Paulo de Gracia Correa, a currency trader at Correparti Corretora de Cambio in Curitiba, Brazil, said in a telephone interview. “It is important to know that Brazil will do what it takes to keep the investment grade and that the president is backing its economic team on crucial fiscal efforts.”
Rousseff also said that Brazil will let the real fluctuate freely and doesn’t intend to intervene in the market to defend the currency.
While the real has fallen the most among major currencies this year, the central bank scaled back support by ending sales of foreign-exchange swaps in March.
“What we are doing is a policy of floating currency, and we’ll continue to do that,” the president said.
Rousseff said spending cuts, including postponing some expenditures and reducing administrative costs, will account for a big part of the necessary adjustments to narrow the budget shortfall.
Her remarks came hours after the announcement of a February budget deficit that was twice as wide as forecast.
“We will carry out a huge cut” to this year’s budget, Rousseff said. “I will do everything to meet” the target.
Finance Minister Joaquim Levy has said spending cuts and tax increases are fundamental to avoiding a credit downgrade. He has pledged to boost the primary surplus, which excludes interest payments, to 1.2 percent of gross domestic product this year from a 0.64 percent deficit in 2014.
Standard & Poor’s affirmed Brazil’s investment-grade credit rating last month, citing a “marked adjustment in various policies” to restore credibility.
The real tumbled 11 percent in 2014 after S&P cut the nation in March of that year to BBB-, the lowest level of investment grade. Moody’s Investors Service, which rates Brazil one step higher, cited a stalled economy and fiscal challenges when it put the country on negative outlook six months later.
Swap rates on the contract maturing in January 2017, a gauge of expectations for changes in Brazil’s borrowing costs, decreased 0.15 percentage point to 13.23 percent.