Brazil's Real Falls on Worse-Than-Expected Economic Contraction

  • Nation posts longest contraction since at least 1996
  • Finance minister meets S&P's Schineller in Brasilia Tuesday

Brazil's Economy Shrinks More Than Forecast

Brazil’s real joined a rally in emerging-market currencies as prospects for stimulus measures in China, the nation’s top trading partner, overshadowed disappointing data from Latin America’s largest economy.

The real added 0.4 percent to 3.853 per dollar in Sao Paulo, erasing earlier losses. A gauge of developing-nation currencies rose for the first time in five days as tepid manufacturing growth in China bolstered views the Asian nation will act to boost its economy. That countered disappointment with a report showing that Brazil’s gross domestic product shrank more than analysts forecast in the third quarter as rising unemployment and faster inflation sapped domestic demand.

“We see the currency now in line with peers,” said Joao Paulo de Gracia Correa, a foreign-exchange director at SLW Corretora de Valores, in Curitiba, Brazil. “Still, volatility should remain high and political developments could change the trend.”

The real has tumbled 31 percent this year amid speculation that Brazil would suffer further credit-rating cuts. President Dilma Rousseff has struggled to revive an anemic economy and shore up at the budget amid opposition in Congress. The currency’s three-month implied volatility, reflecting projected shifts in the exchange rate, was the highest among 16 major currencies. Finance Minister Joaquim Levy was set to meet Standard & Poor’s sovereign analyst Lisa Schineller on Tuesday.

“The currency will remain under pressure over the coming weeks on weak domestic data, political turmoil and a looming downgrade,” said Bernd Berg, a director of emerging-markets strategy at Societe General in London.

Brazil had its credit grade cut by all three major ratings companies this year. Moody’s Investors Service and Fitch Ratings reduced the nation to the lowest investment grade, while S&P cut it to junk, citing the deterioration of Brazil’s fiscal position, political challenges to shoring up government finances and economic weakness.

Swap rates on the contract maturing in January 2017, a gauge of expectations for interest-rate moves, fell 0.06 percentage point to 15.74 percent.

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