Brazilian Real Leads Losses as Output Falls More Than Forecast

Updated on
  • Currency drops to new 12-year low as rout gains momentum
  • Lawmaker reported saying deficit may be worse than projected

Brazil’s real led losses among major currencies and fell to a new 12-year low as a bigger-than-forecast drop in industrial production added to concern that the Latin American nation is facing its longest economic contraction since the 1930s.

The rout gained momentum after a report showed output declined 1.5 percent in July from a month earlier, the biggest drop this year and worse than all of the forecasts of economists surveyed by Bloomberg. Fiscal turmoil weighed on the real as O Estado de S. Paulo cited a lawmaker in reporting that next year’s deficit before interest payments may be bigger than the government’s revised projection of 30.5 billion reais ($8.1 billion). The real may extend its decline as the central bank is forecast Wednesday to refrain from raising borrowing costs for the first time in eight meetings.

The currency declined for a fourth straight day, falling 1.7 percent to 3.7611 per dollar, the weakest level since 2002. The real is 6 percent away from the record intraday low of 4.0040 reached that year. The average directional index, a gauge of momentum for the real, increased Wednesday to 47, above the level of 32 that some traders interpret as a sign a trend is strengthening.

“The real is entering into a freefall as the domestic backdrop deteriorates by the day,” Societe Generale SA strategist Bernd Berg said from London. “In an environment of rapidly deteriorating domestic fundamentals and a bleak external backdrop, the Brazilian currency is poised to intensify its collapse as volatility explodes.”

Higher Volatility

One-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, increased to 22 percent, the highest level since March. Heightened swings add to the risk for investors wanting to take advantage of the highest interest rates among major economies.

Petroleo Brasileiro SA, the state-controlled oil producer with $55 billion of overseas bonds, is among companies potentially seeing leverage ratios swell as the real posts the world’s biggest currency losses in 2015.

For other companies, the plunge in the currency is good news. Shares of pulp producers Fibria Celulose SA and Suzano Papel e Celulose SA have climbed 15 percent in dollar terms this year, the only gainers on the benchmark Ibovespa stock index, as the weaker real improved the outlook for international

President Dilma Rousseff told reporters that Finance Minister Joaquim Levy isn’t isolated and worn out even after several of his recent proposals aimed at avoiding a sovereign credit rating downgrade were blocked.

Budget Outlook

The government reduced its estimate for budget savings for the second time this year amid political resistance to tax increases and budget cuts, along with a drop in tax revenue. Standard & Poor’s has warned that backtracking on fiscal commitments would prompt a downgrade to junk.

Brazil’s central bank is forecast by traders to hold the target lending rate Wednesday at 14.25 percent after seven straight increases. Officials have signaled that keeping borrowing costs at an eight-year high for a prolonged period will be necessary to slow inflation to the 4.5 percent target by the end of 2016. Consumer prices rose at more than twice that pace in the 12 months through mid-August.

Swap rates, a gauge of expectations for changes in Brazil’s monetary policy, climbed 0.37 percentage point to 14.80 percent on the contract maturing in January 2017, the highest level since December 2008.

For Related News and Information:
Top Latin American News: TOPL
Most-Read News on Brazil: MNI BRAZIL
Bloomberg News in Portuguese: NH PBN