Brazilian Real Gains as U.S. Slowdown Damps Fed Increase Outlook

Brazil’s real climbed from a 12-year low as signs of slowed U.S. growth damped speculation that the Federal Reserve will raise interest rates soon, buoying emerging-market assets.

The real appreciated 0.1 percent to 3.2457 per U.S. dollar in Sao Paulo, also drawing support as the government pledged to submit anti-corruption legislation after more than a million people in Brazil took to the streets Sunday. The drop in the real last week to a 12-year low pushed its relative strength further below a level some traders interpret as a sign that its slide may be overdone.

The local currency snapped three days of declines Monday as a U.S. report before this week’s Fed meeting indicated that factory production dropped for a third straight month. The real was still down 18 percent in 2015 amid political turmoil stoked by allegations that executives at Brazil’s state-controlled oil company demanded bribes in exchange for work contracts.

“It’s not certain that the Fed is going to move toward raising rates soon, which helps push up the real as investors look for equilibrium in the currency’s price,” Camila Abdelmalack, an economist at CM Capital Markets in Sao Paulo, said in a telephone interview.

Three-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, was the highest among 16 major currencies.

Corruption Legislation

The administration will deliver anti-corruption legislation within days, officials told reporters in Brasilia after meeting with President Dilma Rousseff. The government has to listen to people marching in the streets, and ample political reform is urgent, Rousseff told reporters in Brasilia on Monday. Some protesters called Sunday for Rousseff’s impeachment in demonstrations that were bigger than those in June 2013.

The real weakened earlier this month past 3 per dollar for the first time since 2004 as Rousseff faced a challenge in the Senate over a plan to unwind payroll tax breaks.

Moody’s Investors Service cited stalled growth and fiscal challenges when it put Brazil on negative outlook in September, six months after Standard & Poor’s cut the nation to one level above junk.

Brazil’s seasonally adjusted economic index, a proxy for gross domestic product, decreased 0.11 percent in January from the prior month after a revised 0.57 percent contraction in December, the central bank said Monday.

Currency Swaps

To support the real and limit import price increases, Brazil sold the equivalent of $97.1 million of currency swaps as part of a plan to offer as much as $100 million a day until at least March 31. It rolled over contracts worth $350.7 million.

Swap rates on the contract maturing in January 2019, measuring expectations for changes in Brazil’s borrowing costs, declined 0.03 percentage point to 13.48 percent. To curb inflation, the central bank raised the benchmark lending rate on March 4 by a half-percentage point to 12.75 percent, the highest level since 2009.

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