Brazil Real Drops for Third Straight Week Amid Economic Concern

Brazil’s real declined for a third straight week amid concern President Dilma Rousseff’s economic team is struggling to address stalled growth and above-target inflation.

The currency fell 0.4 percent to 2.8347 per dollar at the close of trade in Sao Paulo, extending its drop since Feb. 6 to 1.9 percent. The real slid Wednesday to a decade low of 2.8679 per dollar, 0.6 percent weaker than the year-end median forecast among economists surveyed by Bloomberg. Local trading will be suspended early next week for Carnival.

“Investors are sensitive to this increasingly negative economic picture and are positioning themselves ahead of the holidays,” Camila Abdelmalack, an economist at CM Capital Markets in Sao Paulo, said in a telephone interview.

The real has dropped 20 percent over the past six months, the most among 16 major currencies tracked by Bloomberg. Analysts surveyed by the central bank project zero growth in 2015 even as inflation accelerated in January to the fastest pace in more than a decade. A probe of corruption at the state oil company has also hurt investor sentiment.

One-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, was the highest among emerging-market currencies tracked by Bloomberg after the Russian ruble.

The consumer price index jumped 1.24 percent in January from a month earlier, the fastest pace since 2003, the government reported last week. Annual inflation accelerated to 7.14 percent, beyond the 6.5 percent official limit.

Santander Outlook

Banco Santander SA expects Brazil’s economy to contract 0.9 percent in 2015, compared with a previous forecast of 0.3 percent growth, analyst Mauricio Molan wrote in a research report. Even as the bank raised its yearly inflation outlook to 7.6 percent from 7.2 percent, it saw room for a reduction in the target lending rate to 11.75 percent. Brazil raised the so-called Selic on Jan. 21 by a half-percentage point to a three-year high of 12.25 percent.

“Collapsing economic activity and increasing unemployment will be enough, in our view, to minimize the pass-through of currency depreciation into the CPI,” Molan wrote.

To support the currency and limit import price increases, Brazil sold the equivalent of $97.8 million of currency swaps and rolled over contracts worth $629.8 million Friday. The central bank plans to offer as much as $100 million a day until at least March 31.

Controlling inflation is the main economic priority, Rousseff wrote earlier this month in her 2015 message to Congress. Finance Minister Joaquim Levy has raised taxes and limited monthly spending to narrow the widest deficit since at least 2001.

Swap rates on the contract maturing in January 2016, a gauge of expectations for changes in Brazil’s borrowing costs, fell 0.02 percentage point to 13.18 percent. They are still up 0.34 percentage point this week.

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