Brazil Real Rises as Turmoil Takes Back Seat to Oil and Iron Ore

  • Currency is still worst performer this year, down 31 percent
  • Police carried out search at house of the Lower House's head

Brazil’s real gained as a rally in commodity prices overshadowed an increase in political instability after the police carried out a new round of searches in a spreading corruption scandal.

The real rose 0.1 percent to 3.8714 per dollar, after a volatile session in which it declined as much as 0.9 percent and gained 0.6 percent. Emerging-market currencies advanced as oil rebounded from a six-year low reached on Friday amid signs the U.S. may allow unfettered crude exports for the first time in 40 years, and as benchmark prices for iron ore rose 0.8 percent Tuesday after jumping 2 percent Monday. Brazil is among the world’s largest iron-ore exporters.

QuickTake Brazil's Ups and Downs

The real declined earlier as Brazil’s Federal Police carried out searches at the residences of lower house President Eduardo Cunha, who has denied allegations that he accepted bribes and laundered money. Cunha chose to trigger impeachment proceedings against President Dilma Rousseff earlier this month on allegations that she used improper accounting for government finances.

"The volatility in an event-driven environment will be driving emerging markets currencies today and tomorrow," said Ipek Ozkardeskaya, an analyst at London Capital Group. "Gains in the real are fragile."

Police agents surrounded Cunha’s official residence in Brasilia and his house in Rio de Janeiro, according to TV footage broadcast by Globo TV. Cunha’s press office declined to comment when contacted by Bloomberg. The Federal Police said in a statement it is carrying out 53 search and seizure orders in the nation’s capital, as well as seven Brazilian states including Sao Paulo, Rio de Janeiro and Parana.

Cunha is a self-declared opponent of Rousseff, even though his Brazilian Democratic Movement Party is part of the ruling coalition. As house speaker, he is one of the most powerful adversaries to the administration, as he sets the agenda of votes in the lower house.

While this fresh round of raids adds to the country’s political stalemate, it may encourage long-term investors to bet on local companies as a reduction in corruption could benefit business in the country in the future, according to Joao Paulo de Gracia Correa, a foreign-exchange director at SLW Corretora de Valores.

"A lot of investors are in for the long run and a clean-up is definitely good," Correa said.

Moody’s Investors Service last week put the country’s Baa3 rating on review for a downgrade, citing the challenges Rousseff’s government faces in shoring up fiscal accounts while a corruption scandal has Congress in gridlock. The ratings company said that a turnaround next year appears unlikely.

A second cut to junk could trigger a selloff of Brazilian assets by some institutional investors whose bylaws prevent them from holding such securities. Standard & Poor’s stripped Brazil of its investment-grade status in September.

Swap rates on the contract maturing in January 2017, a gauge of expectations on Brazil’s interest-rate moves, declined 0.07 percentage point to 15.98 percent.

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