Brazil’s Currency Volatility Rises as Levy Faces Fiscal Concern
By Paula Sambo/Bloomberg
10:38 AM BRT
May 12, 2015
Brazil’s currency volatility climbed for a second straight day amid speculation Finance Minister Joaquim Levy will face obstacles in his attempt to reduce budget deficits and preserve the nation’s investment-grade status.
One-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, increased to 20.5 percent as of 11:31 a.m. in Sao Paulo, the highest among 16 major currencies tracked by Bloomberg. The real rose 0.5 percent to 3.0461 per dollar after tumbling 2.9 percent Monday.
“Political barriers for the fiscal adjustment weigh on the market,” Ricardo Gomes da Silva Filho, a currency trader at Correparti Corretora de Cambio, said in an e-mailed note to clients. “The proposal is already on Congress’s agenda, but it still requires negotiation.”
Concern that budget shortfalls will widen helped make the real the world’s biggest loser during the first quarter. Two decrees that cut social security spending by as much as 14.5 billion reais ($4.8 billion) lapse June 1 if they don’t pass Congress. A separate bill to raise 12.8 billion reais in corporate-payroll taxes this year has stalled.
The lower house approved the first decree, on unemployment benefit cuts, by a margin of just 25 votes out of 479 cast May 6. Finding time this week to vote on the second decree, which restricts pension pay for surviving relatives, will be difficult, said lower house chief Eduardo Cunha. That could mean even less time for the Senate to vote on the proposal before the end of the month.
Levy has pledged to convert last year’s primary budget deficit of 0.6 percent of gross domestic product into a surplus of 1.2 percent by year-end. The gap, which excludes interest payments, expanded to 0.7 percent of GDP in March.
Swap rates, a gauge of expectations for Brazil’s borrowing costs, increased 0.06 percentage point to 13.61 percent on the contract maturing in January 2017.
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