Brazil’s Real Posts Weekly Loss on Bets Rate Advantage to Fade

Updated on
  • Fed chair’s speech seen supporting idea of rate hike this year
  • Second day of impeachment trial seen as supportive for real

Can Temer Revive Growth in Brazil?

Brazil’s real added to its worst weekly losing streak since January after a speech by Federal Reserve Chair Janet Yellen seemed to back up speculation that U.S. interest rates will rise this year.

U.S. monetary policy is critical for investors in Brazil, which lures capital with benchmark interest rates that are 28 times higher than in the U.S. Yellen said Friday that the case to raise interest rates is getting stronger as the U.S. economy approaches the central bank’s goals, and Fed Vice Chairman Stanley Fischer said the remarks leave open the possibility of an interest-rate hike in September. The comments pushed the dollar up against its major counterparts.

"Yellen was dove-hawk, but all the other Fed speakers during the past weeks were more hawkish," said Leonardo Monoli, a partner at Jive Asset in Sao Paulo.

The real declined 1 percent to 3.2657 per dollar Friday in Sao Paulo, erasing earlier gains of as much as 1.4 percent. The currency fell 1.9 percent in the past five days, capping a third consecutive week of declines.

The real is the world-best performing currency in 2016 as high interest rates attracted investors hunting for better yields and amid speculation that a new government will help pull the country out of its worst recession in a century. President Dilma Rousseff’s impeachment trial over accusations she improperly accounted for government finances entered its second day Friday, and is widely expected to wrap up next week with a vote to end her mandate, after which Acting President Michel Temer would assume the office.

"We may see a rally in the real after the impeachment is formally accepted," said Arnaud Masset, an analyst at Swissquote Bank SA in Gland, Switzerland, and the fourth-best forecaster for the real in the third quarter. "However, this could be short-lived” depending on the outlook for Federal Reserve policy, he said.

The Senate’s 81 members need at least 54 votes to permanently oust Rousseff and ban her from public office for eight years. Temer’s allies are confident they can get 60.

Temer has repeatedly said that after the impeachment trial he will have more freedom to implement policies, including measures to shrink a near-record budget deficit.

Brazilian swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, rose 0.04 percentage point to 12.77 percent.