Brazil Real Gains as U.S. Outlook Offsets Political Turmoil

  • Committee voted to reduce next year’s budget surplus target
  • Fitch handed country its second junk credit grade Wednesday

Brazil’s real gained as speculation that the Federal Reserve’s assurance that interest-rate increases will be gradual offset concern the government will struggle to find a business-friendly replacement should Finance Minister Joaquim Levy quit.

While President Dilma Rousseff is seeking a business executive as her next finance minister, it may be hard to find someone willing to take the post as she fights attempts to impeach her, Folha de S.Paulo reported, without saying how it got the information. Levy and Rousseff’s relationship deteriorated following discussions about the 2016 budget surplus target, the newspaper reported.

The real gained 0.1 percent to 3.8783 per dollar in Sao Paulo, after declining as much as 0.6 percent. One-month implied volatility was the highest among 16 major currencies tracked by Bloomberg. The currency advanced with stocks as risk appetite got a boost from the Federal Reserve’s assurance Wednesday that further interest-rate increases will be gradual.

"Volatility remains high for the real and the Fed decision is being digested now," said Joao Paulo de Gracia Correa, a foreign-exchange director at SLW Corretora de Valores in Curitiba, Brazil. "The scenario outside seems to be more supportive than the local mess in Brazil at this moment."

Brazil’s congressional budget committee on Wednesday voted to reduce next year’s target to a surplus before interest payments of 0.5 percent of gross domestic product from 0.7 percent. The currency also declined earlier Thursday after Fitch Ratings handed Latin America’s largest economy its second junk credit grade, a move that may compel some institutional investors to dump the nation’s assets.

"There is a lot of talk about Levy being close to leaving," said Georgette Boele, an Amsterdam-based analyst at ABN Amro Bank NV. "The problem is that the current political situation is paralyzing, and as a result no tough decisions are being made to improve the fiscal balance and to pull Brazil out of a recession."

Fitch on Wednesday lowered Brazil one step to BB+ with a negative outlook, which implies the potential for further cuts. The move followed Moody’s Investors Service’s warning last week that it may also cut the country to junk, after a reduction by Standard & Poor’s in September. In its statement, Fitch cited a deeper-than-expected recession, adverse fiscal developments and political uncertainty.

Swap rates on the contract maturing in January 2017, a gauge of expectations for changes in Brazil’s interest rates, declined 0.19 percentage point to 15.85 percent.

Before it's here, it's on the Bloomberg Terminal.