Brazil Real Drops as Dilma's Party Said to Urge Rate Cuts

  • Speculation of China stimulus boosts commmodity currencies
  • Currency declines to 4 per dollar; still posts weekly gain

The real dropped the most among Latin American currencies as renewed political tension offset an advance in commodity prices.

The most volatile major currency declined 1.1 percent to 4 per dollar on Friday after O Estado de S. Paulo reported President Dilma Rousseff’s own party is said to be preparing to launch a “national emergency program” to pressure her to change economic policy. The party plans to suggest cutting interest rates and spending international reserves, the newspaper wrote.

The currency advanced as much as 0.6 percent earlier as China’s central bank said it sees room for monetary easing ahead of a meeting of to Group of 20 finance chiefs, boosting demand for riskier assets. The S&P GSCI index of commodities rose as much as 2.4 percent, before erasing gains. The currency still ended the week 0.5 percent higher.

"The risk appetite has been good globally, which is helping the real," said Ipek Ozkardeskaya, an analyst at London Capital Group. "Still, the political imbroglio sounds like a magic formula to push investors out of Brazil and it could accelerate the currency’s depreciation, increasing inflationary pressures."

The currency declined even after Brazil posted primary budget surplus that jumped in January to its strongest level in two years due to a one-time surge in government revenue that is unlikely to be repeated any time soon, according to the central bank.
One-week implied volatility for the real climbed 0.45 percentage point to 18.975 percent.

Swap rates on the contract maturing in January 2017, a gauge of expectations for interest-rate moves, rose 0.01 percentage point to 14.225 percent. They are down 0.01 percentage point this week.

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