Brazil Real Posts World's Biggest Drop as Budget Outlook Worsens

  • BTG Pactual denies allegations it bribed lawmaker Cunha
  • One-month implied volatility rises to highest since October

Brazil’s real dropped the most among major currencies as allegations that Grupo BTG Pactual SA bribed a prominent lawmaker threatened to sidetrack President Dilma Rousseff’s economic agenda.

A note seized by the Attorney General’s office showed that Latin America’s largest independent investment bank paid 45 million reais ($11.6 million) to Eduardo Cunha, now chief of Brazil’s lower house, in exchange for amending a bill to favor the bank, Folha de S. Paulo reported Sunday. BTG and Cunha denied any wrongdoing.

The allegation comes less than a week after the arrest of the government’s leader in the Senate caused a delay to voting on a new fiscal target that needs to be approved for the government to avoid breaching budget rules. The political turmoil could hamper Rousseff’s efforts to ward off further cuts to Brazil’s credit rating after Standard & Poor’s cited fiscal issues when it downgraded the country to junk in September. Meanwhile, Cunha has been considering dozens of requests to impeach Rousseff amid allegations that she didn’t properly account for government finances in 2014 and 2015.

"It is simply too risky to stay in real-denominated assets right now," said Ipek Ozkardeskaya, an analyst at London Capital Group.

The real declined 0.5 percent to 3.8674 per dollar, the worst performer among 16 major currencies tracked by Bloomberg. One-month implied volatility rose 2.60 percentage point to 22.35 percent, the highest since October. The currency is down 31 percent this year as the country is stuck in the middle of its longest recession since the 1930s.

S&P is visiting Brazil this week to analyze the country’s political and economic situation, O Estado de S. Paulo reported over the weekend, without saying where it got the information. The visit is fueling speculation the nation might be downgraded again.

Brazil analysts increased their forecast for the year-end 2016 benchmark interest rate as their outlook for inflation this year worsened for the 11th straight week. The benchmark Selic will finish 2016 at at least 14 percent, up from 13.75 percent previously, according to the Nov. 27 central bank survey of about 100 analysts. Inflation will accelerate to 10.38 percent by year-end and remain above the 6.5 percent top of the target range next year, according to the survey.

Swap rates on the contract maturing in January 2017, a gauge of expectations for interest-rate moves, rose 0.14 percentage point to a nine-week high of 15.80 percent. The rate has climbed 0.73 percentage point in the past five trading days.

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