Brazil’s Real Rallies Despite Soaring Inflation, Fiscal Bill

(Bloomberg) -- The Brazilian real outperformed all major currency peers on Wednesday, reversing course after sliding when data showed consumer prices sped up more than expected last month. 

The real gained as much as 0.9% to 5.4367 per dollar, its strongest level since mid-October. The currency had weakened 0.4% earlier as investors digested annual inflation, which accelerated to 10.67% in October, above all estimates in a Bloomberg survey. 

Lower House lawmakers passed a bill Tuesday that lets the government bend fiscal rules to finance a new social program. The currency whipsawed over the past month with the debate for more government spending leading traders to consider the implications of higher inflation amid what’s already one of the world’s most aggressive tightening cycles. Still, the real rallied in the runup to the bill’s approval as investors feared its rejection could lead to an even more uncertain fiscal plan. 

“Even though the rules are being bent a little bit to accommodate more spending, I still generally think respecting the cap is a positive,” said Brendan McKenna, a strategist at Wells Fargo in New York. “Not breaking the spending cap should boost sentiment.” 

The higher-than-expected inflation figures may be fueling market expectations for the central bank to lift interest rates more aggressively, McKenna said. Strategists from Citigroup Inc. and Bank of America Corp.raised their inflation forecasts for Latin America’s largest economy after Wednesday’s data release. While policy makers disappointed traders last month with a 150-basis-point hike, minutes from the meeting showed they considered a bigger lift amid increased spending and a weaker currency. 

Still, following a steep sell-off and given that higher rates boost the carry trade appeal, some investors see limited room for further depreciation in the currency.

“The real is at a fair value now,” said Andre Jakurski, founding partner at JGP Asset Management. One who bets on further depreciation for the Brazilian currency is “betting on chaos,” Jakurski said in a webcast Wednesday.

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