Brazil’s Real Declines to 12-Year Low as Rousseff Faces Dissent

Brazil’s Real Declines to 12-Year Low as Rousseff Faces Dissent

By Paula Sambo

10:11 AM BRT
March 19, 2015

  

(Bloomberg) — Brazil’s real fell to a 12-year low on concern that disagreements with lawmakers will make it harder for President Dilma Rousseff’s government to rein in deficits and preserve the nation’s investment-grade status.

The real declined for the first time in four days, dropping 1.4 percent to 3.2555 per dollar at 9:46 a.m. in Sao Paulo, the weakest level on a closing basis since April 2003.

The crisis between Rousseff and Congress intensified as Minister of Education Cid Gomes resigned after clashing with the head of the lower house, Eduardo Cunha. Earlier this month, a challenge in the Senate over a plan to unwind payroll tax breaks helped push the real to a level weaker than 3 per dollar.

“The fiscal adjustment is the largest bottleneck of the economy, and markets are closely watching political developments,” Deives Ribeiro, a foreign-exchange manager at Fair Corretora de Cambio in Sao Paulo, said by telephone.

Speculation that the nation may lose its investment-grade credit rating has pushed the real down 18 percent this year, the most among 31 major currencies tracked by Bloomberg.

Moody’s Investors Service cited a stalled economy and fiscal challenges when it put Brazil on negative outlook in September, six months after Standard & Poor’s cut the nation to one level above junk. Moody’s and Fitch Ratings rank the nation at the second-lowest level of investment grade.

Growing social and political unrest in Brazil may “further complicate government efforts to restore investor confidence and achieve fiscal consolidation,” Moody’s analyst Mauro Leos wrote in a research note dated March 19.

Three-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, remained the highest among 16 major currencies tracked by Bloomberg.

Swap rates on the contract maturing in January 2016, a gauge of expectations for changes in borrowing costs, declined 0.06 percentage point to 13.59 percent.

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