Brazil's Real Leads Weekly Gains in Emerging Markets on China

  • Currency rallies with peers after China cut interest rates
  • Move by central bank highlights concern over slowdown

Brazil’s real posted the biggest weekly gain among emerging markets as a surprise interest-rate cut in China bolstered prospects for growth in the Latin American country’s biggest trading partner.

The real advanced 0.8 percent to 3.8763 per dollar on Friday after declining as much as 0.6 percent. The currency rallied with developing-nation peers after China said it would cut interest rates, joining the European Central Bank in signaling willingness to provide economic support if needed.

China’s announcement, one day after ECB President Mario Draghi suggested more stimulus may be needed, eased concerns about the impact of the slowdown in the world’s second-largest economy. Still, the move shows that Chinese policy makers are worried about the extent of the slump. For Brazil, already facing its longest recession since the Great Depression, the prospect of reduced demand from China has helped make the real the worst performing major currency in the world this year.

"The initial reaction in markets is that central banks globally are coming to the rescue to revive global growth," said Bernd Berg, the director of emerging-markets strategy at Societe General in London. "While the real might get some temporary relief in periods where the external backdrop improves slightly due to central bank support, the bigger picture remains very bearish."

Traders are also waiting for the government to announce its new estimate for the 2015 budget gap, expected to be the widest ever. President Dilma Rousseff’s administration is said to be eying a public sector budget deficit before interest payments of about 75 billion reais ($19 billion), according to an official aware of the discussions who asked not to be identified because the information isn’t public yet.

The deficit in the current account, the broadest measure of trade in goods and services, widened in September to $3.1 billion from a revised $2.6 billion a month earlier, the central bank said in a report Friday. Economists surveyed by Bloomberg had forecast a deficit of $2.3 billion.

China’s one-year lending rate will drop to 4.35 percent from 4.6 percent effective Saturday as the government aims to meet its 2015 growth target of about 7 percent. Below-target consumer inflation and a deeper slump in producer prices have given policy makers room for further easing. Gross domestic product rose 6.9 percent in the three months through September from a year earlier, the slowest quarterly expansion since 2009.

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