Brazil Real Declines on Commodities as Analyst Pessimism Grows

  • Index of raw materials declined 2.5% to an 11-year low
  • Economists now expect the economy to shrink 2.99% this year

Brazil’s real followed commodities lower after forecasters turned more bearish on the currency as Latin America’s largest economy heads to its worst recession in more than a century.

The real dropped 0.7 percent to 4.0536 per dollar in Sao Paulo, a three-month low. A new survey from the central bank showed economists expect the real will weaken to 4.25 percent by the end of the year. The S&P GSCI Index of raw materials declined 2.5 percent to an 11-year low as crude fell 5.4 percent in New York to $31.21 a barrel. Commodities account for about half of Brazil’s exports.

As the economy contracts 2.99 percent this year, the real will weaken to 4.25 per dollar, according to the central bank poll of 100 economists released Monday, worse than the prior week’s forecast of 4.21 per dollar. Analysts have lowered their 2016 growth forecast for 14 straight weeks after credit-rating downgrades and a worsening fiscal outlook helped push the real down 33 percent last year, the most among major currencies. Efforts to bolster growth and shore up government finances have been hindered by political gridlock amid efforts to impeach President Dilma Rousseff.

"I for one do not see a positive environment for bets on the local market, given such uncertainty in the economy and politics," said Leonardo Monoli, a partner at Jive Asset Gestao de Recursos. "Even with the currency at such a low level and expectations for interest rates soaring, the trade-off does not seem worth it."

The currency rose earlier amid wagers policy makers would raise borrowing costs after annual inflation accelerated to 10.67 percent last year, the fastest for a full year since 2002. The central bank has the full support of President Dilma Rousseff and Finance Minister Nelson Barbosa to restart its monetary tightening cycle next week, O Globo newspaper reported.

Central Bank President Alexandre Tombini on Friday published an open letter to the government explaining why he missed the bank’s inflation target range of between 2.5 percent and 6.5 percent. He reiterated his commitment to reach the 4.5 percent mid-point in 2017, while Barbosa said in a statement that the government would contribute with fiscal policy and measures designed to boost productivity.

"Efforts made by Rousseff to show that only Tombini can speak about rates are signaling a reinforcement in the central bank’s autonomy," Monoli said.

The real’s depreciation fueled inflation last year, as did the rising price of government-regulated items, Tombini wrote in his open letter to Barbosa.

“We find evidence that Brazil may already be suffering from fiscal dominance and that the central bank’s inflation targeting framework may have been compromised,” Barclays Plc analysts wrote in a Jan. 11 report.

Swap rates on the contract maturing in January 2017, a gauge of expectations on interest-rate moves, rose 0.07 percentage point to 15.60 percent.

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