Brazil Real Posts Worst Month This Year as Investors Lose Faith

June 1, 2016 04:30 PM
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Brazil’s real extended its worst monthly slide this year after the resignation of a second minister in two weeks cast doubt on Acting President Michel Temer’s ability to restore confidence in Latin America’s largest economy.

The real dropped 1.2 percent to 3.6116 per dollar on Tuesday, posting the biggest drop among its most-traded counterparts and extending this month’s decline to 4.9 percent, the biggest since September. Brazil’s currency is still up 9.8 percent in 2016, the most among 16 major currencies tracked by Bloomberg.

Traders have piled into Brazilian assets this year on speculation that a change in government would be able to revive an economy facing its worst recession in a century. Temer, who is serving as Brazil’s interim president while the impeachment of Dilma Rousseff is tried in the Senate, has announced outlines of the policies he will send to Congress to help address Brazil’s budget woes and get the economy growing again. Still, the resignation of a second minister because of leaked audio threatens the stability of his administration less than a month after he took over.

“This is the second minister in Brazil to resign, and chatter is that more tapes will be released implicating other ministers," said Win Thin, the head of emerging-market strategy at New York-based Brown Brothers Harriman. "I was very skeptical that an unelected president would be able to push through painful structural reforms, but having more corruption stories makes it even more difficult for Temer."

The currency extended its decline Tuesday after reports in the local media said the chief executive officer of Banco Bradesco SA, Latin America’s second-biggest bank by market value, was indicted along with two other executives in the so-called Zelotes probe into alleged tax fraud. The indictments were confirmed by federal prosecutors. Bradesco said in an e-mailed statement that it didn’t engage in any wrongdoing.

Fabiano Silveira, the Minister of Transparency and Control, resigned on Monday after local press published a recording of a conversation in which he allegedly criticized the Carwash probe while offering advice to a politician under investigation. Brazil’s biggest-ever corruption investigation has implicated members of the political and business elite in a vast scheme of kickbacks and money-laundering.

"There’s no honeymoon period for Temer," said Mike Moran, the head of economic research for the Americas at Standard Chartered Bank. "This resignation does not come across well - and is a timely reminder that the corruption investigations transcend party lines."

Brazil’s benchmark stock gauge was the world’s worst performer in May. Swap rates on contracts due January 2018 rose 0.01 percentage point Tuesday to 12.82 percent.

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