Brazil Real Posts Longest Rally in a Month on Turnaround Outlook

  • Central bank refrains from acting to curb real appreciation
  • Brazil holds rate steady for the sixth meeting in a row

The real advanced as investors anticipated a turnaround for the Brazilian economy and the Senate prepares to decide on the impeachment of President Dilma Rousseff. The central bank refrained from acting to weaken the currency for a fourth consecutive day.

The currency strengthened 1.1 percent to 3.4890 on Thursday, extending this year’s advance to 14 percent and leaving the real higher every day this week for the longest winning streak since March 22. The central bank held off on selling reverse swaps that tend to weaken the currency in the past four days after resuming the sales on March 21. It has since sold $34 billion of the contracts.

The real has appreciated the most among its most-traded counterparts this year as investors wager that Rousseff will be ousted, ushering in a government more capable of lifting the country out of its worst recession in a century. Vice President Michel Temer -- her successor should she be removed -- has started to reveal some of the main action points of his would-be government, including setting a new, more realistic fiscal target, according to reports in Folha de S. Paulo and other local media.

"The trend is for the real to appreciate with the speculation of a shift in government and in the economic policies,"  said Jessica Strasburg, an economist at CM Capital Markets in Sao Paulo. "The fact that the central bank hasn’t acted to curb the currency’s rise, the favorable environment for emerging markets today and the monetary policy acting within expectations all help support the real."

On Wednesday, the central bank kept its key interest rate unchanged amid the unfolding drama of impeachment proceedings against Rousseff and the country’s economic woes. Policy makers held the so-called Selic rate at a near-decade high of 14.25 percent for the sixth straight meeting. The move was forecast by all 50 analysts surveyed by Bloomberg.

In a change of language from its previous statement, the central bank said there had been progress in the fight to contain price pressures but that high inflation and expectations above its 4.5 percent target don’t offer “room for more flexible monetary policy.”

Swap rates on the contract maturing in January 2017, a gauge of expectations for interest rates, rose 0.11 percentage point to 13.64 percent.

One-month implied volatility in the real dropped 1 percentage point to 17.5 percent, still the highest among the 16 most-traded currencies. The cost of insuring Brazilian bonds in the credit-default swaps market for five years advanced 1.8 basis points to 338.9 basis points, after Brazil’s Supreme Court delayed a decision on whether 11 states can reduce their debts to the federal government, a ruling that could deal another blow to the nation’s shaky public finances.

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