Real Drops Amid Signs Brazil Faces Worst Recession in 25 Years

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The real fell the most among major currencies as Brazil braced for its worst recession in 25 years after the central bank reported that the economy contracted more than forecast in April.

Efforts by President Dilma Rousseff’s administration to reassure investors by increasing taxes and reducing expenditures are expected to damp the nation’s gross domestic product in the second quarter. Moreover, Brazil is the only nation in the Group of 20 to raise interest rates this year as inflation stays above target, further hampering growth prospects.

“It’s not a good picture,” Joao Paulo De Gracia Correa, a foreign-exchange superintendent at SLW Corretora de Valores, said in a telephone interview from Sao Paulo. “The economy is coming in even weaker than anticipated.”

The currency slid for a second straight day, declining 1.2 percent to 3.0978 per dollar in Sao Paulo, the biggest drop among 31 major currencies tracked by Bloomberg. The real was still up 0.7 percent this week.

Brazil’s seasonally adjusted economic index, a proxy for GDP, fell 0.84 percent in April from the prior month, the central bank reported Friday. That was worse than all but one estimate from economists surveyed by Bloomberg, whose median forecast was for a 0.40 percent drop.

Analysts surveyed by the central bank predict that the economy will shrink 1.35 percent in 2015, which would be the worst contraction since 1990.

Faster Inflation

A government report showed inflation accelerated even after the central bank raised its target lending rate June 3 to the highest level since 2009. Consumer prices increased 8.8 percent in the 12 months through mid-June, the fastest pace since 2003. The official target is 2.5 percent to 6.5 percent.

“Inflation keeps accelerating even with worse-than-anticipated activity, and that will translate into more rate hikes,” Correa said.

Swap rates on the contract maturing in January 2017, a gauge of expectations for changes in Brazil’s borrowing costs, increased 0.06 percentage point to 14.04 percent Friday and were up 0.16 percentage point since June 12.

Adding to negative sentiment, Brazilian stocks fell as the heads of two of Brazil’s largest conglomerates were detained by police as part of a widening corruption investigation at the state-controlled oil company.

In a sign of reduced concern over the real’s fluctuations, the central bank extended the maturity on 5,200 contracts Friday, compared with 6,300 earlier this month and 8,100 in May.

Rollovers will be reduced further, which would cause the real to underperform, Citigroup Inc. strategist Kenneth Lam wrote in a research report to clients.

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