Brazil Real Rises as Wage Veto Overshadows Emerging-Market Rout

The Slow Unraveling of Brazil, Explained in Two Minutes
  • President Temer vetoed wage increase for some public workers
  • Domestic optimism offsets a drop in crude oil prices

Brazil’s real rose as positive sentiment generated by President Michel Temer’s veto of a wage increase for some public workers overcame a rout in emerging-market currencies.

The real climbed 1.2 percent to 3.2629 per dollar Friday in Sao Paulo, after earlier dropping by as much as 0.5 percent. The currency outperformed its Latin American peers -- the Mexican peso was down more than 1 percent as oil prices fell -- after Temer’s veto bolstered optimism he’ll remain tough on public spending.

Brazilian assets, which have led global gains this year on speculation the new government can pull Latin America’s biggest economy from its worst recession in a century, had retreated in recent days on concern Temer would struggle to make good on pledges for economic reforms. The new president, who permanently took over on Aug. 31 after Dilma Rousseff was removed from office, has vowed to to trim a budget deficit and make Brazil a more attractive destination for investment.

"Temer’s attitude signals he is working for the fiscal adjustment, even amid investors skepticism and increased political tension," said Camila Abdelmalack, chief economist at CM Capital Markets in Sao Paulo.

One-month implied volatility on the real dropped to 17.9 percent. Buying the real with borrowed dollars in a carry trade has returned 32 percent this year, the most among 42 currencies tracked by Bloomberg.

The high carry in Brazil is accompanied by improving fundamentals, Morgan Stanley wrote in a research note, adding that it is maintaining a bullish position on the real.

“The recent dip in the currency is worth buying," Morgan Stanley strategists Simon Waever and Pratyancha Pardeshi wrote in a note to clients.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, fell 0.05 percentage point to 12.54 percent. The contracts have fallen 0.04 percentage point this week.

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