Brazil Real Advances on Impeachment Momentum as Ibovespa Falls

  • Central bank refrains from intervening to weaken real Monday
  • Stocks follow oil prices lower amid global risk aversion

Brazil’s real gained on speculation that President Dilma Rousseff will be impeached and as the central bank refrained from moving to weaken the currency. Stocks dropped as a decline in oil and iron-ore prices dimmed the outlook for Brazilian producers.

The currency strengthened 0.2 percent to 3.5582 per dollar, extending its gain this year to 11 percent, the biggest advance among its most-traded counterparts. The Ibovespa dropped for a third day, the longest losing streak in a month, led by declines in iron-ore miner Vale SA. The index is still up 34 percent in dollar terms this year, the most in the world behind Peru’s benchmark.

Brazilian assets have surged on wagers that an impeachment would usher in a new government better able to pull the country out of its worst recession in a century, and it appears the opposition has enough votes in the Senate to move ahead with their effort to oust Rousseff, newspapers O Globo, Folha de S. Paulo and O Estado de S. Paulo reported. Policy makers have sold $34 billion of reverse swap contracts this year in an effort to mute the currency gains, which can imperil exports by making Brazilian goods more expensive in dollar terms.

"We have, on the one side, the impeachment prospects that could lead to a more responsible government in the economic front and a better political environment, and on the other side, there is the central bank which has been buying dollars via reverse swaps," said Leonardo Monoli, a Sao Paulo-based partner at Jive Asset Gestao de Recursos. "The central bank refrained from calling an auction today, which is helping support the real."

Vice President Michel Temer spent the weekend in talks to assemble his would-be cabinet should the impeachment go through, meeting with former central bank director Henrique Meirelles and opposition senator Jose Serra, whom Valor Economico newspaper named as the frontrunners to lead the Finance Ministry.

The Ibovespa dropped 2 percent to 51,861.71 as a decline in oil prices triggered global risk aversion. Vale slumped 7.5 percent as iron ore fell 0.4 percent to $66.07 a ton, according to a price index compiled by Metal Bulletin. Usinas Siderurgicas de Minas Gerais SA and Cia Siderurgica Nacional SA both declined at least 9 percent.

State-owned oil producer Petroleo Brasileiro SA slipped 4.3 percent while insurance company BB Seguridade Participacoes SA fell 7.4 percent.

"There is this heavy global risk aversion sentiment that is weighing on Brazilian stocks," said Pedro Paulo Silveira, chief economist at brokerage Nova Futura in Sao Paulo. "Some commodities are correcting from recent gains, and we should see considerable fluctuations here.”

Brazil’s economy will shrink 3.88 percent this year, according to the central bank’s weekly economists survey published on Monday, more than the prior estimate of a 3.8 percent contraction. That’s also more than the 3.85 percent decline registered last year.

The worsening economic outlook has caused inflation expectations to drop, and economists now estimate consumer prices will rise 6.98 percent this year. That’s the first time forecasts have fallen below 7 percent since early January.

Swap rates on the contract maturing in January 2017, a gauge of expectations on interest-rate moves, fell 0.035 percent to 13.485 percent.

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