Brazil Real Declines on Political Outlook; Ibovespa Erases Gains

Can Temer Revive Growth in Brazil?
  • Real’s one-week implied volatility surges to month-high
  • Folha de S.Paulo reports some of Temer’s supporters may desert

Brazil’s real declined, with stocks erasing gains by the end of the day, as the approval of a bill designed to shore up government finances was tarnished by a report that key supporters of Acting President Michel Temer may abandon his coalition.

Expectations for swings in the currency surged, with one-week implied volatility rising to the highest since July and posting the biggest increase among emerging-market currencies. The real fell as much as 0.5 percent and and rose as much as 0.3 percent before ending the day 0.3 percent weaker at 3.2345 per dollar Thursday in Sao Paulo. The Ibovespa closed little changed at 57,722.14 after earlier rising as much as 0.7 percent.

As the impeachment trial for President Dilma Rousseff gets underway, which could end the mandate of a politician unpopular with investors, Folha de S. Paulo newspaper reported that one of the largest parties in the coalition backing the acting administration is threatening to defect.

Brazil’s currency and stocks are leading gains among major markets this year on wagers the new government will bolster growth, shore up the budget and restore confidence in Latin America’s largest economy. While Temer’s government has announced a series of measures aimed at promoting a recovery, it has yet to win approval for most of them in Congress. On Wednesday, the Senate approved a bill that frees up as much as 30 percent of the federal budget, but only after lawmakers made a deal to also approve a minimum-pay increase for federal public defenders, Valor Economico newspaper reported.

"The market remains concerned about the ability of Temer’s government to win approval for the reforms," said Vladimir Caramaschi, the chief strategist at Credit Agricole Brasil SA in Sao Paulo.

An advance in commodity prices Thursday helped to limit losses on the Ibovespa stock benchmark, as producers account for about 23 percent of the gauge’s weighting. State-owned oil company Petroleo Brasileiro SA rose 1 percent, following crude higher, and steelmaker Cia Siderurgica Nacional SA climbed from a seven-week low.

Trading volume of Ibovespa stocks was 19 percent below the 30-day average as global investors awaited for a speech by the Federal Reserve Chair Janet Yellen on Friday to provide indications of the next steps of the monetary policy in the U.S.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest rates, was unchanged at 12.73 percent.

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