Brazil Real Fluctuates Amid Corruption Probe, Rising Oil Price

  • Arrest of former minister seen adding to political problems
  • Real implied volatility rises the most in almost two weeks

Brazil’s real fluctuated between gains and losses amid speculation that economic reforms may be harder to push through congress as a corruption investigation ensnares top politicians and as a rally in commodities bolstered the outlook for the country’s exports.

The real was little changed at 3.2424 per dollar Monday in Sao Paulo in Sao Paulo after swinging between a 0.7 percent gain and a 0.3 percent drop. In a new phase of the so-called Carwash probe, known as Lava Jato in Portuguese, Brazilian police arrested Antonio Palocci Filho, who served as finance minister and chief of staff under former Presidents Luiz Inacio Lula da Silva and Dilma Rousseff, according to newspaper O Estado de Sao Paulo. Palocci’s lawyer couldn’t immediately be reached by phone or text message for comment.

In the past month, the real has given up some of the gains this year as political turmoil damped optimism the government will cut the budget deficit. The long-running corruption investigation could hamper President Michel Temer’s ability to push through measures to cut fiscal spending and boost revenue, according to Nicholas Spiro, a partner at London-based Lauressa Advisory Ltd., which advises asset managers.

"The ’who’s next’ atmosphere surrounding the Lava-Jato probe is not at all conducive to undertaking economic reforms and is undermining Temer’s government," Spiro said. "The real danger is that the rapidly escalating investigation undermines the government’s ability to push through crucial fiscal reforms."

The real rose earlier following commodities higher. Commodities such as iron ore, soybeans and oil account for more than half of Brazil’s exports. The currency is the world’s best performer this year -- surging 22 percent -- amid speculation a new administration would push through measures to revive growth and restore investor confidence. West Texas Intermediate crude advanced 2.7 percent after Saudi Arabia offered to cut output, raising expectations that oil-exporting nations can reach a deal to cap production.

One-month implied volatility in the real rose for the first time in eight sessions, climbing 0.35 percentage point to 15.75 percent. The cost of hedging against losses in Brazil’s dollar-denominated bonds with five-year credit-default swaps rose 6 basis points to 279 basis points.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, was unchanged at 12.22 percent.

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