Brazil Real Drops as China Manufacturing Slump Adds to Pessimism

  • Real extends year's slump to 35%, worst among major currencies
  • Roussseff pledge of support real can't overcome China data

Brazil’s real dropped the most among major currencies as data showing a manufacturing slowdown in China damped the outlook for exports and Fitch Ratings said it could cut the country’s rating at any point.

Profits at industrial companies in China, Brazil’s biggest trading partner, fell the most in at least four years amid weak demand. A gauge of emerging-market currencies hovered near a record low on concern a Chinese economic slump will dent global expansion.

"Negative data in China increases risk aversion toward higher-yielding currencies, especially the real due to the strong commercial relation between Brazil and the Asian country," said Jessica Strasburg, an economist at CM Capital Markets in Sao Paulo.

The currency extended losses, leaving it down 35 percent this year, after Fitch Ratings said that it’s unlikely Brazilian lawmakers will push through measures proposed by President Dilma Rousseff that would have increased taxes and reduced spending to shore up the budget. The country lost its investment-grade rating with Standard & Poor’s earlier this month as political turmoil makes it harder for Rousseff to enact policies that would bring Brazil’s out of what’s forecast to be its worst recession in 25 years.

Brazil has “sufficient reserves” to act in the foreign-exchange market to prevent any kind of “disruption,” Rousseff told reporters Saturday in New York. "The government will have a very clear and firm position’’ on the exchange rate, she said.

While the country is in a moment of transition, its long-term trajectory is still positive, Rousseff said Monday at the United Nations in New York. She said that controlling inflation, boosting growth and expanding credit will help increase household consumption.

The real depreciated 3.3 percent to 4.1096 per dollar in Sao Paulo. Swap rates on the contract maturing in January 2017, a gauge of expectations on interest-rate moves, rose 0.56 percentage point to 16.15 percent.

There’s a better than 1-in-2 chance that Fitch will downgrade Brazil’s rating, analyst Rafael Guedes said Monday in Sao Paulo.

Brazilian policy makers stepped up support for the real last week after the currency reached record lows. The central bank resumed new sales of swap contracts for the first time since March, and the central bank president and the finance minister said separately that Brazil could use part of its $370 billion in international reserves to curtail instability.

Brazil analysts surveyed by the central bank raised their estimate for inflation next year for the eighth straight week on expectations of a weaker real in 2015.

The Brazilian tender has more to fall before the current depreciation cycle ends, most likely at some point in 2017, said Daniel Tenengauzer, head of emerging market foreign-exchange strategy at RBC Capital Markets in New York. He predicts the currency will weaken to 4.9 per dollar.

In China, industrial profits tumbled 8.8 percent in August from a year earlier, with the biggest drops concentrated in producers of coal, oil and metals, the National Bureau of Statistics said Monday in Beijing. It was the biggest decline since the government began releasing monthly data in October 2011, according to data compiled by Bloomberg.

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