Brazil's Real Rallies as China Optimism Offsets Domestic Turmoil

  • Currency also gets a boost as oil rebounds and metals rise
  • Real most volatile major currency on political uncertainty

Brazil’s real gained along with emerging-market currencies as commodities rebounded and traders bet China will support its equity market, offsetting concern at home over a worsening recession and deteriorating budget.

The real rose 1.9 percent to 3.946 per dollar in Sao Paulo. A gauge of 20 emerging-market currencies climbed 0.6 percent as raw materials from crude to iron ore advanced. Speculation that China, Brazil’s top trading partner, will step up efforts to reinvigorate its stock market after a key official was replaced at the Asian nation’s securities regulator supported markets the world over on Monday.

Brazil’s real is tracking global swings after domestic turmoil turned it into the worst-performing major currency in 2015. Still, ongoing concern about the effects of an economy headed to the biggest recession in a century coupled with bets the government is losing its fight to rein in a budget deficit has made the real the world’s most volatile major currency. One-month implied volatility rose 0.2 percentage point to 20.1 percent.

"The improving risk sentiment and the recovery in commodity prices helped the Brazilian real to extend gains on Monday," said Arnaud Masset, an analyst at Swissquote Bank SA in Gland, Switzerland. "Traders have put the domestic situation on the back-burner to focus on the global situation."

The currency also rose as the Brazilian police carried out another series of search and arrest warrants on Monday related to the Carwash scheme of alleged kickbacks at state-run oil company Petrobras. Some investors buy Brazilian assets when speculation increases the the government may be replaced, betting that a new administration would do better at reigning in a fiscal deficit and bolstering growth.

Meanwhile, the outlook for Brazil’s economy worsened as analysts in a central bank survey published Monday said the nation is headed for a deeper recession. Economists in the survey expect gross domestic product to shrink 3.4 percent in 2016 and inflation to end the year at 7.62 percent.

The government has struggled to cut expenditures and on Friday said it would freeze some discretionary spending to help shrink the budget deficit. President Dilma Rousseff’s administration reduced its estimate for a so-called primary budget deficit equal to 0.97 percent of gross domestic product if fiscal revenue falls short of expectations. That would mark the third consecutive year that the government posts a primary gap, meaning a deficit even before interest payments are taken into account.

Swap rates on the contract maturing in January 2017, a gauge of expectations for Brazil’s interest rates, dropped 0.055 percentage point to 14.18 percent.

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