Brazil’s Real Weakens Most in Emerging Markets Ahead of Runoff

Brazil’s real dropped the most in emerging markets as voter polls indicated the runoff between President Dilma Rousseff and Senator Aecio Neves is too close to call, dimming speculation a new government will restore growth.

The real fell 1.3 percent to 2.4291 per dollar in Sao Paulo, the biggest decline among 24 developing-nation currencies tracked by Bloomberg. The real was still up 1.2 percent this week, its first five-day advance since August.

One-month implied volatility on options for the real, reflecting projected shifts in the currency, was the highest in emerging markets as the Oct. 26 runoff approached. The real also dropped today on concern Europe’s economy will struggle to grow, sinking demand for higher-yielding assets.

“The markets were anticipating that Neves would be some 10 points ahead of Rousseff, but they were in fact tied,” Joao Paulo de Gracia Correa, a currency trader at Correparti Corretora de Cambio in Curitiba, Brazil, said in a telephone interview. “Concern over the health of the European economy is drying up demand for riskier assets.”

Neves garnered 46 percent support compared with 44 percent for Rousseff in an Oct. 7-8 Ibope poll, indicating a difference that is within the margin of error of plus or minus two percentage points.

Rousseff is seeking a second four-year term as her administration contends with the nation’s first recession since 2009 and above-target inflation.

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 this week. The official target is 4.5 percent plus or minus 2 percentage points.

Arminio Fraga, the finance minister designate of Neves, said during a debate with Finance Minister Guido Mantega on GloboNews TV that the government has lost control of inflation.

The monetary policy in 2014 was “very rigorous,” and the government fought inflation, Mantega countered. According to Fraga, inflation is being held down by repressing prices.

Brazil’s swap rates, a gauge of expectations for changes in borrowing costs, rose 0.11 percentage point to 11.97 percent today on the contract due in January 2016 and are up 0.06 percentage point this week.

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.

To support the currency, Brazil sold today $197.7 million of foreign-exchange swaps today as part of an intervention program and rolled over contracts worth $393.3 million.

As the International Monetary Fund’s annual meeting in Washington began, European Central Bank President Mario Draghi pledged anew to loosen monetary policy more if needed and called on those governments with the room to ease fiscal policy to do so. In contrast, German Finance Minister Wolfgang Schaeuble warned against U.S.-style quantitative easing and urged continued budgetary discipline.

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