Brazil Real Drops as Commodities, China Turmoil Spark Selloff

  • S&P GSCI Commodity Index falls to lowest since July 2004
  • Members of Brazilian government said to urge Selic rate cuts

The real dropped as China weakened the yuan reference rate for an eighth straight day, fueling concern that the slowdown in Brazil’s top export market is deeper than official data suggest and dimming prospects for trade.

The move spurred a selloff in Chinese equities and forced a trading halt for the second time this week. China is the biggest buyer of the commodities many developing nations rely on to fuel growth, and Brazil is its second-largest supplier of goods from developing nations. The S&P GSCI Index of raw materials declined 0.9 percent to an 11-year low. The real dropped 0.4 percent to 4.0444 per dollar in Sao Paulo.

The pessimism surrounding China is adding to bearish views on Brazil, where credit-rating downgrades, the worst economic contraction in a century and a worsening fiscal outlook helped push the real down 33 percent last year, the most among major currencies. Efforts to bolster growth and shore up government finances have been hindered by political gridlock amid efforts by some lawmakers to impeach President Dilma Rousseff.

"Emerging-market currencies with weaker fundamentals and political uncertainty, such as the real, had the weakest start to the year," said Georgette Boele, an Amsterdam-based analyst at ABN Amro Bank NV.

The real briefly pared losses after China’s securities regulator suspended a new stock circuit-breaker, signaling that the country’s leadership may reconsider or change the system.

In Brazil, industrial production fell more than all analyst forecasts in November, indicating the Latin American nation’s worst recession in decades may have deepened even further in the fourth quarter.

Industrial output declined 12.4 percent in November from a year earlier, the most since 2009. Production slid 2.4 percent from the previous month after a revised 0.6 percent decline in October, the national statistics agency said Thursday.

Investors expect Brazil’s central bank to raise the benchmark Selic rate by as much as 50 basis points when it meets this month. Meanwhile, some members of the government are said to be pushing the central bank to signal a rate cut, according to a report in Folha de S. Paulo newspaper. These members say a rate increase would undermine measures developed by Finance Minister Nelson Barbosa to boost credit and restore economic growth, Folha reported, citing an unidentified government official.

The median estimate of 26 economists surveyed by Bloomberg is that inflation accelerated to 10.79 percent in December, the fastest in 12 years. The IBGE institute will release IPCA inflation figures Friday at 9 a.m. local time.

Swap rates on the contract maturing in January 2017, a gauge of expectations on interest-rate moves, rose 0.02 percentage point to 15.54 percent.

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