Brazil’s Currency Declines as Rousseff Seeks Eased Fiscal Rules

Brazil’s real dropped for a second straight day as the administration of President Dilma Rousseff asked Congress to authorize eased fiscal rules after posting the biggest budget deficit in more than a decade.

The currency declined 0.5 percent to 2.5682 per U.S. dollar at the close of trade in Sao Paulo after rising 0.8 percent earlier today. Swap rates, a gauge of expectations for changes in borrowing costs, climbed 0.07 percentage point to 12.83 percent on the contract maturing in January 2018.

One-month implied volatility on options for the real, reflecting projected shifts in the exchange rate as Rousseff prepares to name a new economic team following her re-election, remained the highest among 16 major currencies. Standard & Poor’s reduced Brazil’s credit rating in March to the lowest level of investment grade, citing slower growth as well as deteriorating fiscal accounts.

“Given the heavy market disappointment after Rousseff’s victory, the risk perception in the market remains elevated,” Ipek Ozkardeskaya, a currency strategist at Swissquote Bank SA in Geneva, said by e-mail. “The jitters over Rousseff’s new team will likely push the real toward 2.75.”

The administration submitted yesterday a bill to increase the amount it can discount from the 2014 primary budget, which excludes interest payments. The measure would help the government reach its budget target even as an economic slowdown crimps fiscal revenue.

There’s an increased chance that Rousseff will nominate former central banker Henrique Meirelles as finance minister because the president is aware that he would help boost investor confidence, according to a person familiar with discussions. Meirelles headed the central bank from 2003 to 2010 under then President Luiz Inacio Lula da Silva.

Brazil Deficits

The replacement for the departing Finance Minister Guido Mantega will face the challenge of reviving growth, slowing above-target inflation and stemming deficits threatening the country’s investment-grade status.

The real rallied for several hours today as Reuters cited people close to the government in reporting that Meirelles is a front-runner for the Finance Ministry post.

Policy makers unexpectedly raised the target lending rate on Oct. 29 by a quarter-percentage point to 11.25 percent to curb above-target inflation. The decision came three days after Rousseff defeated her opponent in the closest presidential race since at least 1945.

To support the real, Brazil sold the equivalent of $197 million of currency swaps today as part of an intervention begun last year rolled over contracts worth $438 million. It posted a foreign-exchange net inflow of $285 million this month through Nov. 7.

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