Brazil's Real Rises Ahead of Congressional Vote on Fiscal Target

  • Chances of new target approval have risen, according to Valor
  • Central bank stepped up support for currency with auctions

Brazil’s real rose ahead of a planned vote in congress on the country’s fiscal target and as the central bank stepped up support for the currency.

The real climbed 0.9 percent to 3.6992 per U.S. dollar Tuesday. The government is working to gather support among lawmakers to guarantee approval of a change to this year’s fiscal target and next year’s budget guidelines ahead of a vote that could happen as early as Tuesday, Valor Economico reported. The chances of approval have improved, the newspaper said.

"Consensus among the Brazilian government and lawmakers should be supportive for the currency as long as there is no deterioration on the fiscal accounts," said Georgette Boele, an Amsterdam-based strategist at ABN Amro Bank NV.

Brazil’s central bank also added support for the real by holding two extraordinary auctions totaling as much as $500 million in foreign-exchange credit lines to boost dollar liquidity. That’s in addition to its regular daily auctions of foreign-exchange swaps.

Chinese conglomerate HNA Group Co. agreed to pay 1.7 billion reais ($455 million) for a stake in Azul Linhas Aereas Brasileiras SA. HNA will become the biggest individual shareholder of Azul, owning a 24 percent stake, and will have a seat in the board of Brazil’s third-largest airline by market share, the companies said in a statement Tuesday.

The real may get a boost as Brazilian assets lure foreign buyers, Joao Paulo de Gracia Correa, a foreign-exchange manager at SLW Corretora de Valores, said from Curitiba, Brazil.

"This money flow will come to Brazil at some point and some investors position themselves ahead of that," Correa said. "With Brazilian assets getting cheaper in dollar terms, there is also expectation that more M&A deals with foreign players will take place soon."

The currency rebounded after earlier declining as much as 0.3 percent following reports that Turkish forces on the Syrian border shot down a Russian warplane, damping appetite for riskier emerging-marking assets. Turkey said the pilots of the Russian jet ignored repeated warnings that it was violating Turkish airspace. Russia’s Defense Ministry denied that the aircraft had ever left Syrian airspace, while President Vladimir Putin accused Turkey of stabbing Russia in the back, warning of “very serious consequences” for relations.

"There was some negative spillover on sentiment from these geopolitical matters earlier, but now emerging-market currencies are shrugging off” concerns and recovering, Boele said.

In Brazil, President Dilma Rousseff will try to win approval for a bill to revive a tax on financial transactions, known as the CPMF, and include it in next year’s budget bill. Public-opinion polls show the majority of Brazilians oppose the levy, as do leading political parties.

Swap rates on the contract maturing in January 2017, a measure of expectations for interest-rate moves, advanced 0.12 percentage point to 15.19 percent. Investors expect Brazil’s central bank to leave the benchmark Selic rate unchanged at 14.25 percent when it meets this week, in line with analysts surveyed by Bloomberg.

Traders expect changes in the central bank’s policy statement after the two-day meeting that starts Tuesday, Marcelo Schmitt, portfolio manager at Sul America Investimentos, said from Sao Paulo.

"The situation is difficult for the central bank," Schmitt said. "Inflation expectations are getting worse by the day and the recession is deepening. The central bank should acknowledge that it is more concerned about inflation, its statement should come with a more hawkish tone.”

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