NEW YORK/LONDON (Reuters) – Brazil’s real fell the most in more than two years on Wednesday to a new record low and shares were also under pressure as financial markets tested the Brazilian government’s spending plans and large budget deficit.
The local currency hit an all-time weakest figure of 6.3139 to the dollar before closing down 2.9% at 6.2896. It was the biggest daily decline since November 2022. The currency previously closed in local trading at 6.26, down 2.7%.
The U.S. Federal Reserve, adding to pressure on the real late in the session, cut rates on Wednesday and signaled it will slow the pace at which borrowing costs fall, helping the dollar strengthen across the board.
The benchmark stock index closed at a six-month low, down 3.15%, the biggest daily percentage decline since November 2022.
The cost of underwriting the country’s bond debt was at a 14-month high, raising concerns among investors as Latin America’s largest economy faces a deepening financial market crisis.
Investors doubt whether lawmakers will be able to pass the bulk of a budget bill aimed at putting public finances on a more sustainable footing.
“Markets are particularly concerned about the overall fragile fiscal path and the fact that this is impacting inflation expectations through pressure on the real,” said Thomas Haugaard, portfolio manager at Janus Henderson in Copenhagen.
“We often need to see the market revolt before painful adjustments are made, but for now it doesn’t look like there will be a fiscal response to the recent turmoil.”
Congress approved the body of a bill late on Tuesday but has yet to vote on some amendments proposed by lawmakers, while Treasury Secretary Fernando Haddad said on Wednesday that the Senate is ready to vote on the bill as soon as Congress sends it.
“We are doing our part: directing the measures to Congress, ensuring that they are not diluted, and convincing people that these measures are necessary to strengthen the fiscal framework,” Haddad said.
Brazil’s central bank held spot auctions of U.S. dollars on Tuesday for a third straight session, reaffirming its tough monetary policy stance.
“The central bank has raised more than expected and intervened in the currency, so they are doing their bit,” said Shamaila Khan, head of emerging markets and Asia Pacific fixed income at UBS Asset Management.
Local government bond yields closed at 14.77% on Wednesday and reached 14.847% on Tuesday, the highest level since March 2016. The yield started the year around 10.5%.
“Right now the bar is very, very low for a positive fiscal surprise,” said Arif Joshi, co-head of emerging markets debt platform at Lazard (NYSE:) Asset Management.
He said fiscal consolidation must go beyond bets that stronger growth will make the fiscal side look healthier and result in real cuts.
“It always starts with small steps and it builds up from there,” Joshi said. “We’re not looking for the full bazooka, we’re looking for baby steps in the right direction.”
Five-year credit default swaps, the cost to insure against a sovereign default, were 194 basis points – the most expensive since October 2023, according to S&P Global Market Intelligence.
The dollar-denominated MSCI Brazil index has fallen more than 30% since the start of the year.
Brazil’s nominal budget deficit, including interest payments on public debt, has risen from 4.6% when President Luiz Inacio Lula da Silva took office in January 2023 to 9.5% of GDP.
