Brazil’s Real Declines on Concern U.S. Fed Will Increase Rates

Brazil’s real fell for the first time in five days as growing signs of recovery in the U.S. labor market added to speculation that the Federal Reserve will begin raising interest rates sooner than expected.

The currency dropped 0.9 percent to 2.3958 per U.S. dollar at the close of trade in Sao Paulo in the biggest decline among 24 emerging-market currencies tracked by Bloomberg. The real climbed earlier today to 2.3601, the strongest intraday level since Sept. 19.

Projected shifts in the currency have mounted before the Oct. 26 second round of the presidential vote, with one-month implied volatility on options for the real increasing today to 23 percent, the highest among developing nations. The real also dropped today as Aecio Neves, who is challenging President Dilma Rousseff in the runoff, still awaited an endorsement from Marina Silva, who finished third in the first round.

“Better-than-expected U.S. job data helped boost the dollar versus the real,” Luciano Copi, manager at Correparti Corretora de Cambio in Curitiba, Brazil, said in an e-mailed research note to clients. “Silva’s postponement of the announcement that she would support Neves also generated speculation.”

Silva is seeking Neves’s commitment to political changes she favors, Beto Albuquerque, who was Silva’s running mate, said in Brasilia. Neves did receive the backing of the Brazilian Socialist Party, on whose ticket Silva ran.

Speculation that a new government would revive economic growth and curb inflation helped to push the real to a one-month high in August.

Inflation Target

Consumer prices increased 6.75 percent in the 12 months through September, the fastest pace since October 2011, the national statistics agency reported yesterday. The official target is 4.5 percent plus or minus 2 percentage points.

Gross domestic product shrank by 0.6 percent in the second quarter from the previous three months after contracting a revised 0.2 percent from January through March.

In the Oct. 5 first round of the election, Rousseff had 42 percent of the vote, followed by Neves with 34 percent and Silva 21 percent. Neves received more than the 26 percent support he garnered in a Datafolha poll published Oct. 4.

Swap rates, a gauge of expectations for changes in borrowing costs, rose 0.03 percentage point to 11.86 percent today on the contract due in January 2016.

The central bank raised the target lending rate by 3.75 percentage points in the year through April to a two-year high of 11 percent in an effort to curb inflation before holding borrowing costs steady for the past three meetings.

Brazil sold today $197.8 million of foreign-exchange swaps as part of an intervention program to support the currency and rolled over contracts worth $393.4 million.

In the U.S., figures from the Labor Department showed that the number of people seeking jobless benefits at state employment agencies averaged 287,750 in the four weeks ended Oct. 4, an eight-year low.

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