Brazil Real Rallies as Political Turmoil Takes Back Seat to Fed

Brazil’s real followed a rally in major currencies against the dollar as global appetite for riskier assets overwhelmed concerns about the outlook for Latin America’s largest economy amid political strife.

The real rebounded from the biggest slide since 2011 as disappointing economic reports out of China and the U.S. spurred wagers the Federal Reserve will refrain from boosting interest rates to avoid a further slowdown. The speculation overshadowed concern over political turmoil in Brazil, which is headed toward the longest recession since the 1930s amid a widening corruption scandal.

“Expectations of a later Fed hike are helping higher-yielding assets such as the real,” said Georgette Boele, an Amsterdam-based strategist at ABN Amro Bank NV. “The situation in Brazil remains a challenging one at best. When investors move back to fundamentals and political challenges, the real could get under pressure again.”

The real climbed 2.1 percent to 3.8126 per dollar, joining gains in all 16 major currencies against the dollar. Swap rates on the contract maturing in January 2017, a gauge of expectations on Brazil’s interest-rate moves, fell 0.21 percentage point to 15.59 percent.

The currency has tumbled 30 percent this year, leading world losses, amid concern that Brazil’s political turmoil could exacerbate the recession and cause the nation’s finances to deteriorate further. Standard & Poor’s last month cut the nation’s credit rating to junk, putting pressure on the economic team led by Finance Minister Joaquim Levy to win passage of measures that would shore up the country’s fiscal situation by cutting spending or raising taxes.

President Dilma Rousseff has been unable to find support for her initiatives amid an investigation into corruption at the state-controlled oil company that allegedly occurred while she was its chairman, sending her popularity to a record low and generating calls for her ousting. Brazil’s lower house chief suspended a decision whether to start impeachment proceedings as the Supreme Court questioned his guidelines for ousting a president.

“Markets reacted negatively to the news, potentially due to weaker prospects of impeachment,” Kenneth Lam and Dirk Willer, strategists at Citigroup Inc., wrote in a report to clients Wednesday.

The real rose even after data showed Brazil’s retail sales in August tumbled more than economists estimated as inflation and unemployment drag down confidence. Uncertainty is prompting people to delay purchasing decisions and avoid risks, and they will remain “very cautious” until some sort of political agreement is reached to implement fiscal measures, Levy said at an event in Lima on Saturday.

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