Brazil’s Real Climbs Most in a Month on Sign of Budget Progress

Brazil’s real rose the most this month on speculation the government is starting to make progress in curbing deficits that threaten the nation’s investment grade.

The real climbed 1.9 percent to 3.2308 per U.S. dollar at the end of trade in Sao Paulo, the biggest advance since Feb 27. The currency was up 0.6 percent this week after falling Thursday to a 12-year low.

Reviving optimism among some investors, Valor Economico reported that tax revenue was better than expected in February, and the central government was headed for a second straight month of surpluses excluding interest payments. The real is still down 18 percent this year, the worst performance among 31 major currencies, as Finance Minister Joaquim Levy’s budget measures faced opposition in Congress and allegations of corruption at the state-controlled oil company drew street protests.

“After so many days of bad news, a second straight monthly surplus shows that Levy’s team is trying to do whatever it takes to meet targets,” Cristiano Oliveira, the chief economist at Banco Fibra SA in Sao Paulo, said by telephone. “Still, volatility is quite high, today’s news doesn’t establish a new trend and the currency should remain pressured in the near term.”

Reflecting projected shifts in the exchange rate, three-month implied volatility on options for the real remained the highest among 16 major currencies tracked by Bloomberg.

Moody’s Outlook

Moody’s Investors Service cited a stalled economy 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. Moody’s and Fitch Ratings rank it a step higher.

Growing social and political unrest in Brazil may “further complicate government efforts to restore investor confidence and achieve fiscal consolidation,” Moody’s analyst Mauro Leos wrote in a research note dated March 19.

Tony Stringer, a Fitch managing director, said this week that Brazil’s government has limited ability to stimulate the economy through fiscal policy. An announcement on the nation’s sovereign rating may come in a few weeks, Stringer said.

To support the real and limit import price increases, the central bank sold the equivalent of $97.4 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 $353.8 million.

Swaps Program

Brazil will outline the future of the swaps program in coming weeks, central bank President Alexandre Tombini said at an event in Sao Paulo on March 18.

Swap rates on the contract maturing in January 2016, a gauge of expectations for changes in borrowing costs, declined 0.08 percentage point to 13.69 percent, extending their drop this week to 0.17 percentage point.

Annual inflation accelerated to 7.9 percent in the 12 months through mid-March, the national statistics agency reported. That was faster than 6.5 percent upper limit of the official target.

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