Brazil Markets Riled as Fresh Data Adds to Budget Concerns

(Bloomberg) -- Brazilian markets suffered additional losses Friday as fresh data on the country’s budget deficit fueled concerns about President Luiz Inacio Lula da Silva’s commitment to shoring up its fiscal accounts.

Traders dumped the Brazilian real and pushed interest rate swaps higher, suggesting they expect the central bank to hike borrowing costs despite the insistence of policymakers that they are not considering such a move. Friday’s 1.4% decline for the real adds to a selloff that has made it the worst-performing currency in the world this week.

It was sparked by new data that shows the May primary budget deficit was deeper than expected, while Brazil’s jobless rate fell more than analysts had forecast. Those readings came on top of a rebalancing of JPMorgan Chase & Co.’s widely followed bond index, which prompted traders to reduce their exposure to Brazil debt. That, in turn, spilled over to the currency market.

“Budget data this morning reinforces market participants’ concerns that fiscal discipline is being ignored,” said Brendan McKenna, an emerging markets FX strategist at Wells Fargo & Co. McKenna said Brazil’s primary balance is now “essentially back to 2016 levels, when public finance concerns arguably peaked.”

The real’s rapid weakening has put the central bank on alert. Policymakers are monitoring its performance compared to peers to gauge whether it is a sign of increased risk aversion among investors toward Brazil, Monetary Policy Director Gabriel Galipolo said during a Friday afternoon event.

Analysts have grown increasingly skeptical about Finance Minister Fernando Haddad’s ability to follow through on pledges to eliminate the primary fiscal deficit — which excludes interest payments — since lawmakers shot down his latest proposal to bolster revenues earlier this month.

BRL Has Breached Key Supports to Eye 5.75/USD

Lula’s renewed criticism of the central bank after it halted its easing campaign and left the benchmark Selic at 10.5% last week had also already put investors on edge. His calls for measures to secure more revenue while only hesitantly embracing the potential need for spending cuts further agitated markets earlier in the week.

“The market is increasingly worried about the rhetoric of increased spending and attacks on the central bank,” said Gustavo Okuyama, a portfolio manager at Porto Asset, a money management firm based in Sao Paulo.

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Lula has repeatedly weighed in on monetary policy, saying he sees no need to keep rates so high and blasting bank chief Roberto Campos Neto by name. That has boosted concerns that policymakers will turn more dovish toward inflation once Campos Neto’s term expires later this year, and swap futures — known as DI contracts — maturing in Jan. 2027 rose 30 basis points over the last three sessions.

“Noise around monetary policy, discomfort with the country’s fiscal framework and Lula’s resistance to containing the growth of public spending weigh on the market,” said Sergio Goldenstein, brokerage firm Warren Rena’s chief strategist.

--With assistance from Maria Eloisa Capurro.

(Updates real decline in second paragraph, adds Galipolo comment in fifth paragraph)

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