Brazil Real Falls Most in Emerging Markets on Political Turmoil

  • Stocks fall, led by Petrobras as oil slides; Vale jumps
  • Friday’s currency drop marks fourth consecutive decline

Brazil’s real posted the biggest loss in emerging markets and stocks fell amid speculation that economic reforms may be derailed by fresh political turmoil.

The real fell for a fourth day, weakening 0.4 percent to 3.41 per dollar as of 4:30 p.m. in Sao Paulo, after declining as much as 2 percent earlier in the day. The benchmark Ibovespa slipped 0.2 percent as gains in iron-ore producer Vale SA were offset by declines in the state-controlled oil company, Petroleo Brasileiro SA.

Investors were discouraged by allegations that President Michel Temer, tasked with reining in a budget deficit and rebuilding confidence in Latin America’s largest economy, may have tried to pressure a minister in a business dealing to benefit another government official. Newspapers reported that former Culture Minister Marcelo Calero, who resigned last week, recorded a conversation in which the president allegedly urges him to approve the construction of a building where Temer’s top congressional liaison, Geddel Vieira Lima, had a stake. Geddel said Thursday he is resigning.

"This political crisis could weaken the government exactly at a time when it is necessary to approve the fiscal adjustment measures,” said Luciano Rostagno, the chief strategist at Banco Mizuho and one of the most accurate Brazil inflation forecasters in Bloomberg surveys. "This would make the fiscal adjustment more difficult, as the environment would be unfavorable for the reforms debate."

The president’s press office confirmed that Temer talked twice to Calero in order to mediate a conflict between government members, but said the president “never induced any of his ministers to take a decision that breaches internal rules or convictions.”

The allegations against Temer are “very serious,” a Worker Party’s leader said. After former President Dilma Rousseff, a member of that party, was impeached earlier this year, the tape adds to political tensions days before the Senate is set to hold its first vote on a spending cap bill that’s seen as a cornerstone of getting the nation’s finances back on track.

Vale gained 3.6 percent as iron ore prices rose for a fifth consecutive day, bringing this week’s gain to 15 percent for the world’s largest iron-ore producer. Petrobras slumped 2.1 percent as oil fell. Frequent flier services company Smiles SA fell 3.9 percent, one of the biggest declines on the Ibovespa.

One-week implied volatility in the real climbed the most in two weeks, rising 0.8 percentage point to 17.4 percent. Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, rose 0.02 percentage point to 12.6 percent.

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