Brazil Real Declines as Brexit Aftermath Dims Appetite for Risk

  • Premium investor demand to hold emerging-market debt widens
  • Economists forecast the Selic will end the year at 13.25%

The real joined a selloff in emerging markets as the U.K.’s vote to leave the European Union spurred concern the global economy will weaken at a time when Brazil is already facing its worst contraction in a century.

The currency dropped 0.5 percent to 3.3928 per dollar on Monday, briefly extending losses after the U.K. was downgraded by S&P Global Ratings. A gauge of emerging-market currencies declined 0.8 percent as the aftershocks of the Brexit decision reverberated across financial markets after a weekend of political turmoil. The pound extended its record selloff and European equities dropped to levels last seen in February.

Brazilian officials sought to reassure investors that Latin America’s economy would withstand the turmoil, with Foreign Minister Jose Serra writing in a guest column in Folha de S. Paulo newspaper that the economic impact would be minimal. Economists surveyed by the central bank last week maintained their forecast for the currency to end the year at 3.6 per dollar, 5.7 percent weaker than current levels.

"Investors are looking for safer assets and staying away from emerging markets like Brazil while they ascertain the consequences of” Brexit, said Joao Paulo de Gracia Correa, the head of foreign currency at brokerage SLW in Curitiba, Brazil.

The real briefly extended losses after S&P lowered the U.K’s rating to AA from AAA, citing the risk of a less predictable, stable, and effective policy framework in the U.K. The cut also “reflects the risks of a marked deterioration of external financing conditions” and constitutional issues arising from the majority of voters in Scotland and Northern Ireland having opted to remain in the EU.

Brazilian swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, dropped 0.1 percentage point to 12.54 percent. Economists forecast the Selic will end the year at 13.25 percent from its current level of 14.25 percent, the central bank survey showed. In the prior period, they expected the rate to fall to 13 percent. They also increased their year-end inflation forecast for the sixth straight week to 7.29 percent, from 7.25 percent previously.

Acting President Michel Temer said he hopes the benchmark interest rate will fall this year, as his administration struggles to pull Latin America’s largest economy out of its longest downturn in decades, Folha reported June 24. Temer said monetary easing would help revive confidence, adding that borrowing costs should be cut responsibly.

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