Brazil Currency Bears Retreat as Rousseff Shows Budget Resolve

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Bets against the Brazilian real are at a four-month low as President Dilma Rousseff musters political support for efforts to cut budget deficits and preserve the nation’s credit rating.

In the lower house of Congress, the ruling coalition has enough votes to reverse payroll tax breaks, according to Jose Guimaraes, the government’s leader in that chamber. Rousseff, meanwhile, is expected to veto part of legislation covering unemployment benefits, blocking changes that may increase government spending, Veja magazine reported.

“There seems to be some positive fiscal developments,” Camila Abdelmalack, an economist at CM Capital Markets in Sao Paulo, said in a telephone interview. “There is the expectation that Rousseff has enough votes to get a crucial measure for the fiscal adjustment approved.”

Overseas holdings of futures contracts wagering against the real tumbled 5.6 percent over the past two days to $33.2 billion, the lowest level since Jan. 29. The real rallied 1.1 percent to 3.0566 per dollar Wednesday. Federal Reserve officials lowered their forecast for the benchmark U.S. lending rate next year, supporting demand for higher-yielding assets from emerging markets.

Brazil’s currency has risen 4 percent this month as Finance Minister Joaquim Levy pressed lawmakers to pass measures designed to produce a budget surplus before interest payments following a deficit last year. The so-called primary deficit as a percentage of gross domestic product expanded in April to the widest since 1998 amid economic contraction in the first quarter.

Original Goal

Guimaraes said the increase in revenue from the reversal of payroll tax breaks will be smaller than the government’s original goal of raising 12.8 billion reais ($4.1 billion) a year because amendments granted exceptions to some industries.

Moody’s Investors Service, which rates Brazil at the second-lowest investment grade, cited a stalled economy and fiscal challenges when it put the South American country on negative outlook in September.

Swap rates, a gauge of expectations for Brazil’s borrowing costs, decreased 0.03 percentage point to 13.93 percent on the contract maturing in January 2017.

Brazil extended the maturity Wednesday on 6,300 foreign-exchange swap contracts worth $307 million, compared with 8,100 daily last month.

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