Brazilian Real Declines to Nine-Year Low Amid Economic Weakness

Brazil’s real fell to a nine-year low as a report indicated that Latin America’s largest economy unexpectedly contracted in October, adding to concern that President Dilma Rousseff will struggle to revive growth.

The currency slid 1.5 percent to 2.6958 per dollar at the close of trade in Sao Paulo, the weakest closing level since March 2005. Swap rates, a gauge of expectations for changes in borrowing costs, climbed 0.14 percentage point to 12.69 percent on the contract due in January 2017.

The real dropped as the central bank reported today that the seasonally adjusted economic index, a proxy for gross domestic product, fell 0.26 percent in October from a month earlier. That was worse than every estimate from 27 economists surveyed by Bloomberg, whose median forecast was for a 0.25 percent expansion. One-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, remained the highest among 16 major currencies.

“Markets are waiting to know what the new economic team has in mind,” Joao Paulo de Gracia Correa, a trader at Correparti Corretora de Cambio in Curitiba, Brazil, said in a telephone interview. “Meanwhile, we have all this negative economic data weighing on the currency.”

Evidence of contraction increases the challenges for incoming Finance Minister Joaquim Levy, who has promised to impose more rigorous fiscal discipline.

Analysts in a central bank survey published today cut their median forecast for GDP expansion in 2014 to 0.16 percent from 0.18 percent. After falling into a recession in the first six months of the year, the Brazilian economy grew 0.1 percent in the third quarter.

Credit Rating

Sluggish growth and budget deficits led Standard & Poor’s to reduce the country’s sovereign-debt rating in March to one level above junk. In September, Moody’s Investors Service changed Brazil’s outlook to negative.

While consumer prices rose at an unexpectedly slower rate of 6.56 percent in the 12 months through November, the pace still exceeded the official target of 2.5 percent to 6.5 percent. Analysts surveyed by the central bank expect inflation at 6.38 percent in 2014 and 6.5 percent next year.

Policy makers raised the target lending rate on Dec. 3 by a half-percentage point to 11.75 percent and said in minutes that additional changes in borrowing costs will probably be carried out with restraint as fiscal policy becomes tighter.

To support the real and limit import price increases, Brazil sold today the equivalent of $196.8 million of currency swaps under a program authorized through year-end and rolled over contracts worth $489.6 million.

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