The Brazilian real, the best-performing major currency against the dollar this year, has failed so far to add convincing gains after the vote to impeach president Dilma Rousseff.
A marathon Senate session resulted in the vote to begin the impeachment process being passed by 55-22, paving the way for Ms Rousseff to be suspended for six months and for vice-president Michel Temer to be appointed interim president.
The real advanced this year as momentum gathered behind the impeachment campaign. General weakness in the dollar has also boosted the real, along with most other emerging market and commodity currencies.
A muted early reaction in foreign exchange markets suggests the appreciation this year may be as far as the real goes for the time being. The currency swung between a gain of 0.5 per cent to 3.4460 and a loss of 0.3 per cent in London trading.
Much of the real’s drop came in the first quarter, and while there have been some sharp declines triggered by political uncertainty, the real is trading at the same level as at mid-April.
One reason is that Brazil’s central bank has been intervening in the market to prevent the real from appreciating too far, preferring a weaker currency to lift an economy in its worst recession in decades.
Peter Kinsella, EM FX strategist at Commerzbank, said he expected the BCB to continue intervening, but in addition the market has probably already priced in the impeachment vote, and the incoming administration “has its work cut out”.
Brazil will have a government that can focus on its problems, said Mr Kinsella, “but this is easier said than done and we expect political uncertainty to remain elevated”.
Brazil’s financial markets have been buoyant in recent days as the impeachment vote neared, pushing up the Bovespa, the country’s equity market. But David Rees at Capital Economics said investors “may have got ahead of themselves to some degree”.
Although Mr Temer is viewed as a market-friendly politician, no leader had the clout to push through the kind of structural reforms Brazil needed for economic recovery, he said, while commodity prices in the near-term were unlikely to offer the country much help.
“The upshot is that we still expect the Bovespa to end this year only a little higher at around 55,000 (from about 53,000 currently), while we would not be surprised to see the real weaken a little towards R4 (from around R3.50),” Mr Rees wrote in a note.
Goldman Sachs said it was taking a neutral stance on the real, noting a sharp narrowing in Brazil’s current account deficit which in other cases tends to point towards stable currency performance, lower inflation and rate cuts.
Brazil has for some years had an overvalued currency and a modestly undervalued real would help the country’s exporters and help the current account to improve further, said Goldman.
It added: “We recognise the risk of a near-term overshoot to stronger levels on political dynamics, but executing a credible fiscal plan will be a challenge for any administration.”
Copyright The Financial Times Limited 2016