Brazil Real Falls as Probe Advance Offsets Stimulus Speculation

  • Investigation renews focus on ruling Workers' Party in scandal
  • Police are checking whether former President Lula owned home

Brazil’s real dropped for the first time this week as a widening corruption probe offset speculation the government will announce as much as $12.3 billion of new loans to revive Latin America’s largest economy.

The real trimmed this year’s gains after Brazil’s federal police carried out search and arrest warrants in four cities on Wednesday to probe allegations of money laundering related to a graft scheme at state oil company Petroleo Brasileiro SA. The currency advanced earlier after a person familiar with the discussions said Finance Minister Nelson Barbosa was expected to make the stimulus announcement on Thursday.

Traders have pushed down the value of Brazil’s real by the most in the world over the past year as President Dilma Rousseff struggles to shore up the nation’s finances while the economy heads toward the deepest recession in a century. To make matters worse, the new round of arrests adds to concern over heightened turmoil in a country where some of the biggest companies and elite politicians have been engulfed into allegations of a bribery scheme known as Carwash.

"There are many concerns in Brazil how far these operations from the Federal Police can go, and it ends up spilling into market sentiment," said Reginaldo Galhardo, a foreign-exchange manager at Treviso Corretora de Cambio in Sao Paulo.

The probe put the spotlight back on the Workers’ Party at a time when Rousseff is trying to regain political momentum amid a pending impeachment process. The target of the investigation is whether construction company OAS SA and the bankers’ housing cooperative Bancoop used real-estate properties to launder money received from kickbacks, said Federal Prosecutor Carlos Santos de Lima. As part of the probe, police are checking whether former President Luiz Inacio Lula da Silva owned one of the properties, an apartment in the Guaruja beach complex.

The real dropped 1.4 percent to 4.1099 per dollar in Sao Paulo, after earlier advancing as much as 0.5 percent. Three-month implied volatility on the currency advanced 3.9 percent to 19.5 percent, to the highest among 16 major currencies tracked by Bloomberg.

Swap rates on the contract maturing in January 2017, a gauge of expectations on interest-rate moves, dropped 0.03 percentage point to 14.70 percent.

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