Brazil's Real Leads World Gains as Rousseff Scores Congress Win

  • Lawmakers upheld vetoes overturning spending increases
  • Legislators resumed voting on other vetoes Wednesday

Brazil’s real led world gains after Congress upheld President Dilma Rousseff’s vetoes of legislation that would have increased spending at a time when the government is seeking to shore up the budget and ward off a credit-rating downgrade.

The currency rose 1.3 percent to 3.7648 per U.S. dollar Wednesday, the most among 16 major currencies. Swap rates on the contract maturing in January 2017, a measure of expectations for interest-rate moves, dropped 0.07 percentage point to 15.45 percent.

Increased spending could have dealt a blow to the administration’s efforts to revive investor confidence in Latin America’s largest economy, whose rating was cut to junk by Standard & Poor’s in September. The real has tumbled 29 percent this year as the government struggles to revive the nation’s finances amid forecasts for the longest recession since the 1930s and a widening corruption scandal.

"These votes were a positive sign for markets, although it is a bit early to say that the tide has changed for Brazilian assets," Reginaldo Siaca, a currency manager at TOV Corretora de Cambio, said from Sao Paulo.

Rousseff issued the vetoes after Congress earlier this year rebelled against the administration by passing the legislation. Without the three vetoes upheld Tuesday and Wednesday, government expenditures would have grown by more than 47 billion reais ($12 billion) through 2019 and tax revenue would have fallen by 16 billion reais over the same period, according to government estimates.

The high cost to bet against the real could also be boosting the currency, according to Ipek Ozkardeskaya, an analyst at London Capital Group in London.

With the Brazilian benchmark rate at 14.25 percent, betting against the real costs about 1.2 percent a month, and "when there is high volatility, investors are more concerned to enter these positions and be caught on the wrong side of the trade," Ozkardeskaya said.

One-month implied volatility in Brazil’s currency fell to 20 percent on Wednesday from 26.5 percent a month ago, yet remains the highest among 16 major dollar counterparts tracked by Bloomberg.

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