Brazil Real Falls With Economic Outlook Returning as Main Driver

  • Economy will contract 3.5% this year, according to analysts
  • Real had posted best rally among emerging markets last week

The real fell as economists said this year’s recession will be deeper than previously expected, throwing cold water on a four-day rally that sent the currency to a three-month high last week.

The real declined 0.9 percent to 3.7852 per dollar Monday in Sao Paulo. Analysts in a central bank survey published Monday said Brazil’s economy will shrink 3.5 percent this year, compared with an estimate of 3.45 percent a week earlier.

The currency’s 6.6 percent gain last week made it the best performer among emerging markets amid speculation that President Dilma Rousseff will be impeached, potentially ending the political gridlock that has prevented the government from passing reforms to shore up the economy and fill a budget deficit.

“After such a strong move last week, investors start questioning how long this positive momentum is going to last with such a deteriorating economy,” said Georgette Boele, a currency strategist at ABN Amro Bank NV in Amsterdam who forecasts the real will weaken to 4 per dollar by the end of the year. “The sentiment has been so positive in the past sessions that people start coming back to reality and realizing that there aren’t many positive drivers out there.”

Traders have pushed down the real 19 percent over the past 12 months after credit downgrades that cost the country its investment-grade rating. Rousseff, the least popular president in Brazil’s modern history, has faced opposition to measures she said are needed to shore up the economy as lawmakers began efforts to impeach her for allegedly improper accounting of government finances. More recently, her predecessor and mentor Luiz Inacio Lula da Silva was called in for questioning last week tied to an investigation into corruption at the state oil company, bolstering speculation she could eventually be compelled to resign.

Swap rates on the contract maturing in January 2017, a gauge of expectations for Brazil’s interest rates, rose 0.075 percent to 14.125 percent.

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