Brazil Real Advances as U.S. Data Outweighs Lula Graft Scandal

(Bloomberg) -- Brazil’s real strengthened as investors seeking the highest interest rates among the world’s biggest economies dismissed the risk of increasing political tension.

The currency appreciated 1.3 percent to 3.3026 per dollar Thursday in Sao Paulo. One-month implied volatility on the real rose 0.02 percentage point and was the second-highest in the world. Buying the real with borrowed dollars in a carry trade has returned 30.5 percent this year, the most among 42 currencies tracked by Bloomberg.

One of the last data releases before U.S. policy makers meet to set interest rates showed that sales at U.S. retailers dropped more than forecast in August, leading traders to trim bets the Federal Reserve will raise rates next week. The real is particularly sensitive to global interest rates because Brazil’s local benchmark -- at 14.25 percent -- is the highest among the Group of 20 countries and is more than 28 times the overnight rate in the U.S.

"There is this perception that with weaker data in the U.S., the chances of the Fed raising rates in September are decreasing," said Mauricio Oreng, a senior strategist at Rabobank in Sao Paulo who forecasts the real will weaken to 3.4 per dollar by year-end. "This is positive for emerging markets currencies such as the real, which benefit from the carry deal."

The Brazilian currency extended gains after a government member said that both the lower house and the Senate will be able to vote on a spending limit proposal this year. The government bloc in Congress knows that the spending limit must be approved, lawmaker Rogerio Schumann Rosso told reporters in Brasilia.

Recent political turmoil in Brazil had dimmed optimism the government will be able to muster support for measures to cut the budget deficit. On Wednesday, Brazilian prosecutors accused Luiz Inacio Lula da Silva of masterminding the biggest graft scheme in the country’s history, saying the former president enriched himself and orchestrated kickbacks that cost the country billions of dollars. He denied the allegations.

A possible trial or arrest of Lula could prove problematic for newly-confirmed President Michel Temer, who is calling for calm after the impeachment of his predecessor, Dilma Rousseff, polarized Brazil. "Lula’s arrest could create an upheaval," Workers’ Party Senator Paulo Paim said Wednesday.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest rates, dropped 0.04 percentage point to 12.59 percent.