Brazilian Real Leads in Volatility as S&P Outlook Offsets Rates

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The real’s swings between losses and gains were the highest among major currencies as concern Brazil is facing a downgrade to junk offset speculation the central bank will increase borrowing costs by another half-percentage point.

The gain in volatility this month added to the risk for investors wanting to take advantage of the highest interest rates among major economies as Standard & Poor’s changed its outlook on Brazil to negative. Borrowing dollars at the end of June and selling them to buy reais in a so-called carry trade lost 5.8 percent as of Wednesday, the worst performance in the world after the Colombian peso.

“Interest rates are increasing, but volatility is so high, which makes carry trade strategies quite tricky,” Ricardo Gomes da Silva, a currency trader at Correparti Corretora de Cambio in Curitiba, Brazil, said in a telephone interview. “There could be more downgrades going forward or a deterioration of the whole political scenario. It’s hard to make clear bets now.”

The currency climbed 0.8 percent to 3.3311 per dollar at the close of trading Wednesday, after earlier falling 0.4 percent. Three-week historical volatility has increased to 16.37 percent from 14.23 percent at the end of June. Swap rates, a gauge of expectations for Brazil’s borrowing costs, declined

0.09 percentage point to 13.84 percent Wednesday on the contract maturing in January 2017.

Traders still project the central bank will raise the benchmark lending rate by a half-percentage point to 14.25 percent after the close of trading and by a quarter-percentage point in September to control above-target inflation.

S&P Concerns

S&P cited challenges to balancing the budget and the unprecedented investigation of public officials Tuesday when it adopted a negative outlook. It said in its statement that there is a “greater than one-in-three likelihood that the policy correction will face further slippage given fluid political dynamics and that the return to a firmer growth trajectory will take longer than expected.”

The company rates the nation at BBB-, the lowest level of investment grade, while Moody’s Investors Service, whose ranking for Brazil is one level higher, put the nation on negative outlook in September.

The Finance Ministry reiterated in an e-mailed statement its commitment to fiscal austerity measures and said it would seek to review mandatory public spending to reduce overall debt.