Brazil Real Leads World Declines Amid Renewed Political Tension

Updated on
  • Retail sales declined more than forecast in December
  • Brazilian currency slumps for fifth time in six days

The Brazilian real led world losses as the government tried to push Congress to pass a proposed tax increase to avoid other levies that could further weigh on economic growth.

The real slumped 1.7 percent, the most among 31 major currencies to 4.0676 per dollar in Sao Paulo, reaching the weakest closing level since Jan. 28. One-week implied volatility climbed 0.98 percentage point to 19.65 percent.

President Dilma Rousseff threatened to seek other tax increases should Congress fail to approve a levy on financial transactions, warning that spending cuts have reached their limit as she seeks to shore up the budget, O Globo reported. Rousseff, who is battling efforts to impeach her over the way she accounted for government finances, has struggled to tame a growing deficit and revive the economy after Standard & Poor’s and Fitch Ratings cut the country’s credit rating to junk last year.

"Rousseff’s threats add to political tension that could keep sidetracking her economic agenda," said Joao Paulo de Gracia Correa, a foreign-exchange director at SLW Corretora de Valores in Curitiba, Brazil. "It is quite a challenge to support the economy and at the same time deal with the fiscal situation, and we see volatility increasing."

With retail sales falling more than forecast in December as a two-year recession erodes Brazilians’ purchasing power, tax hikes could further dent consumer demand, he said. Sales slumped 2.7 percent, the national statistics agency reported Tuesday, topping the median estimate for a 2.5 percent decline among 37 economists surveyed by Bloomberg.

The outlook for Brazil’s economy worsened as analysts in a central bank survey published Monday said the nation is headed for a deeper recession. Economists in the survey say Brazil is set for its deepest economic contraction in more than a century as they expect gross domestic product to shrink 3.33 percent in 2016 and inflation to end the year at 7.61 percent.

Swap rates on the contract maturing in January 2017, a gauge of expectations for interest-rate moves, dropped 0.12 percentage point to 14.28 percent.