Brazil Real Posts World's Best Gain as Impeachment Draws Closer

  • All members of audit court reject president’s 2014 accounts
  • Three-month implied volatility on options rises to 21.5%

Brazil’s real advanced the most among major currencies, rebounding from the world’s biggest loss Wednesday, as a court ruling put President Dilma Rousseff a step closer to facing impeachment over the way the government accounted for its finances last year.

The real advanced 2.7 percent to 3.7853 per dollar, its strongest level in more than four weeks. Three-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, increased to 21.5 percent.

An audit court recommended late Wednesday that Congress reject government accounting practices for the first time since 1937 in a decision that could be used as legal justification to impeach Rousseff and usher in a new administration. Her opponents say the government used fiscal maneuvers last year that broke the law in order to hide a budget deficit. Rousseff’s legal team denies the accusations. 

"Rousseff is extremely weak and doesn’t have many political tools on her hands to implement the fiscal adjustment," Camila Abdelmalack, an economist at CM Capital Markets in Sao Paulo, said in a telephone interview. "It is still unclear how harmful to the country an impeachment process could be. But, at this moment, the perception of her out of office and being replaced by someone who can get support for adjustments helps explain the rise in the real."

The government was also unable to secure the necessary quorum in Congress to hold a vote on presidential spending vetoes twice this week. That could be seen as a sign the president is struggling to win support, even after she ceded greater control of her government through a cabinet shuffle in a bid to bolster support among allies and fend off threats of an impeachment.

A measure of market depth showed the size of orders were lower than average while spreads between offers to buy and sell the currency were wider than normal, an indication of thin trading volume.

“The audit findings will add ammunition to her harshest opponents looking to dial up the pressure,” Mike Moran, the head of economic research for the Americas at Standard Chartered, said from New York. “This is a timely reminder that the challenges facing the administration remain a key source of risk and will keep sentiment volatile.”

Brazil’s real sank to a record low last month after Standard & Poor’s cut the country’s rating to junk, the third downgrade during Rousseff’s almost five-year tenure.

“An increase in the likelihood of an impeachment will be seen as positive and could result in higher valuations,” said Daniel Klusmann, who helps oversee $2.2 billion as a money manager at Aviva Investors Global Services in London. “Any such increase will be short lived as the country needs a stable government to put into place a fiscal reform agenda.”

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