Brazil's Real Declines Most in World as Central Bank Intervenes

  • Bank central bank auctions foreign-exchange reverse swaps
  • Brazil real implied volatility highest among major currencies

Brazil’s real led a drop in the world as the central bank extended its efforts to weaken the currency after a first-quarter rally made it the world’s best performer.

The real fell 1.3 percent to 3.6888 per dollar on Thursday after the central bank sold 8,500 of the 20,000 foreign-exchange reverse-swap contracts it offered, a move that’s equivalent to buying dollars in the futures market. The program, introduced last month, ended three years of bank efforts to support the real.

Policy makers are changing tactics after the real climbed 10 percent against the dollar in the first quarter, bolstered by lawmakers’ efforts to impeach President Dilma Rousseff, which some investors say could help pull Brazil out of its worst recession in a century. The real is also the most volatile emerging-market currency and led losses Thursday amid a selloff in riskier assets worldwide on concerns that global growth is slowing.

While a change in government is seen as supportive to the real, the lack of clarity about political developments should add to volatility, according to Denise Prime, investment manager for emerging fixed-income markets at GAM in London.

"Brazil’s fiscal situation will remain complicated given the deep economic recession,” Prime said in a note to investors. “Investor confidence would likely improve" with an impeachment, she wrote.

After dumping the real last year after the country lost its investment-grade rating, traders turned bullish in the first three months of 2016 amid signs that a change in government may be closer. Brazil’s Ibovespa rose the most among the biggest global benchmarks on Thursday because of speculation support for impeachment is increasing.

One-month implied volatility for the real is the highest among emerging-market currencies, at 24.9 percent, data compiled by Bloomberg show.

Swap rates on the contract maturing in January 2017, a gauge of expectations for interest rates, rose 0.04 percentage point to 13.88 percent.

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