Brazil Real Falls as Industrial Output Drops More Than Forecast

  • Drop highlights challenges Temer still faces to restart growth
  • Report overshadows improving sentiment over reform measures

Brazil’s real declined as industrial production contracted more than forecast, highlighting the challenges President Michel Temer still faces as he tries to pull the country out of its worst recession in a century.

The real fell 0.2 percent to 3.2095 per dollar at 9:50 a.m. in Sao Paulo. Industrial output declined 5.2 percent in August from a year earlier. The drop was steeper than the 4.8 percent contraction analysts surveyed by Bloomberg had forecast, overshadowing improving sentiment over the government’s ability to win support for measures aimed at restoring growth.

Brazilian assets, which have led global gains this year on speculation the new government can pull Latin America’s biggest economy from its worst recession in a century, had retreated in the past month on concern Temer would struggle to make good on pledges for economic reforms. His administration is betting a spending cap bill will be easily approved in the Lower House after the result of municipal elections, O Globo and Valor Economico newspapers reported. Meanwhile, pension reform, one of the most important pillars of the fiscal adjustment, is likely to be analyzed by Temer this week, they reported.

"While there is less political uncertainty after the municipal elections, weak industrial production is preventing the real from outperforming the dollar," said Georgette Boele, a currency and commodity strategist at ABN Amro Bank NV in Amsterdam and one of the top forecasters for the real in the past quarter. "Still, with sentiment regarding Brazil improving further, I expect volatility."

Temer’s PMDB and its main ally, PSDB, were the biggest winners of last weekend’s municipal elections as they will manage a combined 33 percent of the country’s cities starting in 2017. The Workers’ Party of ousted President Dilma Rousseff suffered heavy losses, losing control of Sao Paulo, the country’s largest city, to the PSDB. Investors see results as supportive of bets on the recovery of Latin America’s biggest economy.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, rose 0.02 percentage point to 12.11 percent.