Brazil Real Posts Monthly Slide Amid Heightened Political Woes

  • Local currency has its fourth straight month of losses
  • Rousseff skips party event over weekend amid spending discord

Brazil’s real declined for a fourth straight month amid increasing tension between President Dilma Rousseff and her party as a corruption probe gets closer to her administration, offsetting China’s efforts to boost its economy.

The currency dropped 0.4 percent to 4.0159 per U.S. dollar Monday, after advancing as much as 1.2 percent earlier. While one-week implied volatility for the real declined, it was still the second highest among major currencies after South Africa’s rand.

A corruption probe is getting closer to Rousseff after the strategist behind her electoral victories in 2010 and 2014 was arrested last week on accusations of using foreign bank accounts to allegedly receive illicit funds from offshore companies controlled by one of Brazil’s largest builders.

The sweeping corruption investigation in Brazil known as Carwash “has the potential to pressure the currency going forward," said Cleber Alessie, a currency trader at H.Commcor DTVM.

The currency strengthened earlier after China, Brazil’s biggest export market, stepped up its efforts to mitigate an economic slowdown by reducing the amount of cash its banks must hold in reserve. China is the biggest market for commodities exports, and raw materials gained on the news of further stimulus, boosting 20 emerging markets currencies.

Rousseff decided to skip a major event that celebrated the 36th anniversary of her Workers’ Party this weekend in Rio de Janeiro, opting instead to extend a state visit to Chile through the weekend. The president’s efforts in her second term to cut the budget deficit by trimming labor benefits and pension payouts have strained relations with the party, which traditionally favors robust social safety nets.

Rousseff is becoming more isolated as her support base decreases, said Bruno Rovai, Brazil economist at Barclays Plc in New York.

"The allegations against her campaign manager could potentially link the Carwash investigation directly to President Rousseff," he wrote in a note to clients Monday . "We continue to see President Rousseff fighting to regain governance and credibility with her support base, while trying to pass unpopular fiscal measures to try to contain the fiscal deterioration that threatens the sustainability of the debt ratios of the country."

Brazil’s government debt is likely to grow to more than 80 percent of gross domestic product in the next three years, Moody’s Investors Service wrote last week as it cut the country’s sovereign rating to junk.

Swap rates on the contract maturing in January 2017, a gauge of expectations for interest-rate moves, fell 0.045 percentage point to 14.18 percent. They were down 0.34 percentage point this month.

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