Brazil Real Fluctuates as Oil Slide Offsets Central Bank Caution

  • Second round voting on bill to cap spending seen later Tuesday
  • Oil prices slid amid uncertainties on production accords

Brazil’s real was little changed as traders weighed a slide in oil prices with expectations for smaller interest-rate cuts.

The currency dropped less than 0.1 percent to 3.1235 per dollar as of 12:09 p.m. in Sao Paulo after earlier reaching the strongest since July 2015 amid investor optimism that a spending-cap bill will be approved and expectations for dollar flows from repatriated wealth. 

Raw-materials make up more than half of Brazil’s exports, so commodity prices can be a gauge of future inflows. West Texas Intermediate crude slipped, reversing earlier gains, amid output disagreements from big producers. OPEC’s secretary-general was due to visit Baghdad for talks after Iraq said it should be exempt from planned cuts.

"There is uncertainty in markets about the agreements between big oil producers," said Rafael Ohmachi, an analyst at Guide Investimentos.

The real earlier advanced, adding to the 27 percent gain this year, as traders who borrow from countries with low interest rates to invest in Brazil -- where the 14 percent benchmark for borrowing costs is the highest in the G-20 -- were encouraged by minutes from the central bank’s latest meeting. Policy makers said inflation projections allow for gradual and moderate rate cuts but indicate a limit to the extent of the easing cycle. 

Buying the real with borrowed dollars in a so-called carry trade has returned 39 percent this year, the most among 42 currencies tracked by Bloomberg.

“The central bank is reinforcing the importance of its own inflation forecasts as a guidance for the easing cycle," said Mauricio Oreng, a senior strategist at Rabobank in Sao Paulo, who forecasts the benchmark rate will be cut to 13.5 percent by year end.

The lower house of Congress is scheduled to hold a second-round vote Tuesday on a constitutional amendment to cap increases in public spending, one of the key measures the central bank is monitoring. Agencia Brasil reported the morning session of the lower house didn’t have minimum quorum and was suspended. The bill is now scheduled to be voted in the afternoon and if approved, would be sent to the Senate.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, rose 0.08 percentage point to 12.24 percent.

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