Real Drops as Fed Concern Joins Deficit in Damping Demand

The real tumbled the most among emerging-market currencies on speculation the Federal Reserve will curtail monetary stimulus and amid concern Brazil’s budget deficit will lead to a cut in the nation’s credit rating.

The currency fell 1.4 percent to 2.3054 per dollar today, the biggest drop since Nov. 5. Swap rates on the contract maturing in January 2015 climbed 11 basis points, or 0.11 percentage point, to 10.88 percent. Brazil’s markets were closed yesterday for a holiday.

Only 10 percent of investors in a Bloomberg Global Poll said Brazil can avoid a reduction in its credit rating next year. In the U.S., Fed officials signaled in minutes of their October meeting published yesterday that they may taper their $85 billion in monthly bond buying in coming months if the economy improves as anticipated.

“The big question now is when exactly the Fed will begin tapering and by how much,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimento SA in Sao Paulo, said in a telephone interview.

The real has fallen 2.9 percent since Oct. 31, when Brazil reported that the government deficit as a percentage of gross domestic product swelled to 3.3 percent in September, the largest since 2009.

Standard & Poor’s and Moody’s Investors Service lowered their outlooks this year on the nation’s credit rating, which both companies have at two levels above junk.

Brazil Pessimism

According to a poll of 750 analysts, investors and traders who are Bloomberg subscribers, 51 percent said they are pessimistic about President Dilma Rousseff’s policies, compared with 22 percent when she took office in January 2011.

The world’s second-largest emerging market will offer one of the worst opportunities over the next year compared with the U.S., U.K., European Union, Japan, India, Russia and China, respondents said.

Swap rates rose today as a drop in unemployment and the decline in the real added to speculation that central bankers will increase the target lending rate to 10 percent this month to curb inflation.

The national statistics agency reported that the jobless rate fell to 5.2 percent in October, below the 5.4 percent median estimate of 32 economists surveyed by Bloomberg. Inflation accelerated to 5.78 percent in the 12 months through mid-November, more than a percentage point higher than the central bank’s target.

Brazil has raised the target lending rate to 9.5 percent from a record low 7.25 percent this year, the most among 49 nations tracked by Bloomberg, in a bid to cool consumer demand and hold down prices.

Swap Rollover

The central bank extended the maturity on $991 million of foreign-exchange swaps in a sixth straight session of rollover auctions. It sold $497 million of swaps earlier today as part of a $60 billion intervention to bolster the real and curb import price increases.

The real also dropped as an index of China’s manufacturing slipped for the first time in four months, spurring concern the recovery in Brazil’s largest trading partner is stalling.

The preliminary 50.4 reading for China’s Purchasing Managers’ Index for November published today by HSBC Holdings Plc and Markit Economics compares with the final reading of 50.9 last month. Figures above 50 indicate expansion.

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