Brazil Real Declines as Volatility Highest in Emerging Markets

  • Lower house leader remains at odds with President Rousseff
  • Government said close to announcing 50 billion-real deficit

Brazil’s real dropped as concern over the outlook for Latin America’s largest economy amid a political strife outweighed optimism that Finance Minister Joaquim Levy will stay in his post.

The real declined 0.5 percent to 3.9053 per dollar, after earlier rising as much as 1 percent. The currency is down 32 percent this year, the most among developing nations, on concern the government will struggle to ward off credit-rating cuts as the country heads into its longest recession since the 1930s. One-month implied volatility was 25.4 percent, the highest in emerging markets Tuesday.

"As Levy remains finance minister, the political tensions could ease, even if momentarily, and let the real benefit from an increased global risk appetite," said Ipek Ozkardeskaya, an analyst at London Capital Group. "Volatility should remain as not a single step has been taken to consolidate the budget amid deepening political frictions."

Lower house President Eduardo Cunha remains at odds with President Dilma Rousseff and local media have reported he filed an appeal with the Supreme Court to reverse its decision to suspend impeachment procedures. Cunha, who has been weakened by corruption allegations, reiterated he won’t step down from his post while criticizing Rousseff’s government. Meanwhile, opposition lawmakers delayed filing a new impeachment request to Wednesday.

The government is preparing to announce a budget deficit excluding interest payments of as much as 50 billion reais ($13 billion) in 2015, according to news website UOL. Officials will revise the budget target for the third time, changing this year’s goal to a deficit from a surplus, UOL said.

Rousseff’s efforts to trim spending and raise taxes have met resistance from lawmakers concerned that the moves will hurt Brazil’s middle class. Fitch Ratings lowered Brazil’s debt rating to one level above junk last week, delivering the fourth downgrade under Rousseff’s watch, and said it could cut the grade again as government finances deteriorate.

Swap rates on the contract maturing in January 2017, a gauge of expectations for interest-rate moves, dropped 0.12 percentage point to 15.30 percent.

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