Brazil Real Rises on Speculation Spending Vetoes Will Be Upheld

  • Commodity advance also helping emerging-market currencies
  • Swap rates on contract maturing January 2017 decline

Brazil’s real headed for its longest winning streak in seven weeks, bolstered by optimism that government spending cuts will be upheld in a Congressional vote.

Lower house President Eduardo Cunha said lawmakers will probably support President Dilma Rousseff’s vetoes of spending bills that would have boosted the budget deficit. A gauge of emerging-market currencies climbed as commodities rallied and stocks from developing nations reached a two-week high.

The real strengthened 1.8 percent to 3.8435 per dollar at 4:03 p.m. in Sao Paulo, bringing the gain over the past three trading sessions to 4.4 percent. It briefly erased gains after Congress officials said the veto decision was delayed to Wednesday 11:30 a.m. Brasilia time from Tuesday. The currency touched a record low last month on concern Rousseff will struggle to reignite growth in an economy forecast to post its worst contraction in 25 years amid above-target inflation and calls for her impeachment.

"Even with rising hope that vetoes on spending could be upheld and a positive step toward the budget consolidation is possible, the political risk is something that many are afraid of," said Ipek Ozkardeskaya, an analyst at London Capital Group.

Court rulings are expected this week on alleged irregularities in Rousseff’s campaign financing and the government’s 2014 budget, which could be grounds for impeachment.

Earlier this year, Rousseff vetoed salary increases and pension payouts that would have boosted government spending by 63 billion reais ($16 billion) over four years. The administration has been negotiating with lawmakers for weeks to uphold its vetoes, arguing the measures would strain government finances. Her efforts to trim spending and raise taxes have met resistance from lawmakers concerned that the moves will hurt Brazil’s middle class.

Brazil will eliminate eight ministries and reduce remaining ministers’ salaries by 10 percent in an cabinet reshuffle announced Friday. As part of the shakeup, Rousseff is giving members of the Brazilian Democratic Movement Party authority over seven ministries, essentially ceding greater control of her government in a bid to bolster support among allies and fend off threats of an impeachment.

Swap rates on the contract maturing in January 2017, a gauge of expectations for interest-rate moves, fell 0.14 percentage point to 15.26 percent.

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