Brazil Real Leads World Losses Amid Efforts to Weaken Currency

  • Lawmakers pushed Rousseff a step closer to impeachment Monday
  • Implied volatility for the currency rose to a six-month high

Brazil’s real dropped the most among major currencies as the central bank stepped up efforts to weaken the currency after a first-quarter rally made it the world’s best performer.

Brazil’s currency, the most volatile in emerging markets as traders try to gauge the outlook for a complicated impeachment effort, fell 1.9 percent to 3.5615 per dollar at 1:09 p.m. in Sao Paulo after the central bank sold 40,000 foreign-exchange reverse-swap contracts Tuesday, a move that’s equivalent to buying dollars in the futures market. In a surprise move, the central bank called a second auction of up to 40,000 reverse foreign exchange swaps. The program, introduced last month, ended three years of bank efforts to support the real.

The central bank is intervening after the real climbed 10 percent against the dollar in the first quarter on wagers that attempts to impeach President Dilma Rousseff would lead to a new government that could help boost business confidence and curb a record fiscal deficit. The real tumbled last year as Brazil lost its coveted investment-grade status and a sweeping corruption scandal hit businesses and the government. One-month implied volatility for the currency, a measure of anticipated swings, rose 0.3 percent on Tuesday to 28.09 percent, a six month high.

"The intensification in the central bank intervention is strong," Pablo Spyer, operational director at Mirae Asset Wealth Management, said from Sao Paulo. "The impression is that the central bank just wants to reduce volatility in the currency, which is very high."

On Monday, lawmakers pushed Rousseff a step closer to impeachment after a committee in the lower house voted for her ouster.

With a tally of 38 in favor and 27 against, the special lower house committee recommended impeachment proceed on allegations that Rousseff bypassed Congress to illegally finance a budget deficit. The margin was wider than originally forecast by the government, O Globo newspaper reported. The full house could vote as early as April 17, potentially setting the stage for Rousseff’s ouster in the Senate.

The cost of insuring Brazilian bonds in the credit-default swaps market for five years declined 12 basis points to 366 basis points. Swap rates on the contract maturing in January 2017, a gauge of expectations for interest rates, rose 0.01 percentage point to 13.77 percent.

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