Brazil Real Extends World’s Best Gains After Rousseff Impeached

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  • Currency has surged 23% this year on impeachment speculation
  • Investors have high expectations for Temer’s administration

Brazil’s real rose as Dilma Rousseff was impeached, paving the way for a fundamental shift in economic policy after the country sank into its deepest recession in a century.

The currency defied a slump in emerging markets Wednesday, climbing 0.4 percent to 3.2267 per dollar Wednesday in Sao Paulo after Senators found Rousseff guilty of bypassing Congress to finance government spending, paving the way for her vice president, Michel Temer, to serve out her term until general elections in 2018.

Brazil’s financial markets have rallied this year on prospects that Temer, once he formally takes over, will win support for legislation to cap a near-record budget deficit and overhaul the pension system. After plunging 33 percent in 2015 as the country lost its investment-grade credit rating, the real is the world’s best performing currency in 2016 after high interest rates attracted investors hunting for better yields and amid speculation that a new government will bolster growth.

"Coming from a very attractive starting point, the real has been outperforming as a result of the change of president and government, which are important factors behind the rally this year," said Per Hammarlund, the chief emerging-market strategist at SEB SA in Stockholm and one the top forecasters for the Brazilian currency.

Congress had begun impeachment proceedings last December on allegations that Rousseff used accounting tricks to mask the size of a budget deficit. The Senate opened the trial last week and since then has held five marathon sessions, including one on Monday in which Rousseff took questions from legislators for 14 hours. She repeatedly denied wrongdoing.

Latin America’s largest economy contracted more than analysts forecast in the second quarter. Brazil’s gross domestic product declined 0.6 percent in the three months ended in June, after a revised 0.4 percent drop in the previous quarter, the national statistics institute said Wednesday. The figure was worse than the median estimate for a 0.5 percent decline from 46 economists surveyed by Bloomberg. From a year earlier, GDP shrank 3.8 percent after a 5.4 percent drop in the previous quarter.

"It’s not Brazil’s underlying fundamentals that are driving the real, it’s the conviction among investors that a Temer presidency is bound to be better than a Rousseff one," said Nicholas Spiro, a partner at London-based Lauressa Advisory Ltd., which advises asset managers. "If you combine Brazil’s enticingly high yields with a change of government, you have a winning combination despite the plethora of risks going forward."

Brazilian swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, gained 0.01 percentage point to 12.78 percent.