Brazil Real Weakens as Politics Overshadow Reduced Intervention

  • Central bank reduces reverse swaps auction to $250 million
  • Bank slow’s pace of intervention after currency’s weakness

Brazil’s real dropped as a selloff in emerging-market currencies and speculation that economic reforms may be harder to push through congress overshadowed the central bank’s decision to halve daily interventions aimed at weakening the currency.

The real slid 0.9 percent to 3.3448 per dollar Wednesday in Sao Paulo after falling the most in four months on Tuesday. Brazil’s centrist political parties are regrouping with the goal of taking control of the Lower House next year, according to O Estado de S. Paulo. That could create trouble for President Michel Temer’s fiscal adjustment plan as the parties are seen less supportive of measures including pension reform, the newspaper said.

In the past month, the real has given up some of the gains that has made it the world’s best performing currency this year as political turmoil damped optimism the government will shore up the budget and pull Brazil out of its worst recession in a century. The selloff prompted policy makers to announce yesterday that they would offer 5,000 reverse foreign-exchange swaps, equivalent to buying $250 million in the futures markets, on Wednesday. The central bank had been offering $500 million of the contracts daily since Aug. 19.

"The central bank is showing itself to be effective, but the political tensions are weighing on Brazilian assets," said Italo Abucater, the head of foreign-exchange trading at Icap Brasil, who expects the real to rise to as strong as 2.9 per dollar in the next two months.

One-month implied volatility in the real climbed 0.12 percentage point to 18.62 percent, the highest since July 5. The cost of hedging against losses in Brazil’s dollar-denominated bonds with five-year credit-default swaps rose 7.6 basis points to 277 basis points.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, fell 0.05 percentage point to 12.63 percent.

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