Brazil's Real Posts Best Week Since 2011 as Fiscal Debate Eases

  • Currency also joins emerging-market rally on Fed speculation
  • Ibovespa has longest advance since 2013 as Vale jumps

Brazil’s real extended its best weekly rally since 2011 and stocks gained as the political debate over measures to shore up the budget eased and speculation the U.S. will refrain from raising interest rates spurred an advance in emerging markets.

The currency climbed to a one-month high after President Dilma Rousseff on Oct. 2 announced a cabinet reshuffle as she tries to rebuild the nation’s finances to avoid another credit-rating downgrade. The advance accelerated as signs of weakness in the American economy sparked bets the Federal Reserve won’t boost borrowing costs this year. The benchmark stock gauge gained for a ninth day, posting its longest winning streak in two years.

“There’s some sort of relief after so much anxiety,” Lauro Vilares, an analyst at brokerage Guide Investimentos, said from Sao Paulo. “It’s good to see some real action by the government. Meanwhile, the Fed speculation helps with the overall mood.”

The real added 0.6 percent to 3.7633 per dollar, bringing this week’s gain to 4.5 percent. The Ibovespa advanced 0.5 percent to 49,338.41. Miner Vale SA rose with commodities, while lender Itau Unibanco Holding SA dropped.

Brazil’s Congress passed most of the budget cuts, pension reforms and tax increases designed by Rousseff’s economic team to rein in government spending and curb above target inflation. Mauro Leos, a senior analyst at Moody’s Investor Service, said that the government is showing intention to make progress on strengthening the country’s fiscal accounts.

Still, Rousseff moved a step closer to impeachment when an audit court recommended late Wednesday that Congress reject her 2014 budget accounting amid allegations her government broke fiscal laws to hide a deficit. The government will demonstrate she did nothing wrong, the presidency said in an e-mailed statement after the ruling was announced. The next day, Lower House President Eduardo Cunha said he had received two new impeachment requests, bringing the total to eight.

"When we assess events over the past few weeks, there has been no substantive shift on fundamentals, it is somewhat of a debate on whether the impeachment/resignation risk is credit positive or negative," Siobhan Morden, the head of Latin America fixed income at Jefferies Group LLC in New York, said in a report. A regime change “could provide some political capital and commitment for policy re-balancing and potential for an important shock to investor sentiment,” she wrote.

In the next few weeks, the political situation in Brazil will still set the trend for stocks, according to Pedro Paulo Afonso, an investments director at brokerage TOV Corretora.

“There’s a lot of uncertainty hanging over the market,” he said from Sao Paulo.

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