Brazil’s real firmed against the dollar yesterday as its Senate voted to suspend President Dilma Rousseff pending trial, but emerging equities traded flat as investors awaited fresh impetus for the fading rally.
Brazilian assets have risen to near their 2016 highs this week in anticipation of the Senate voting to put Rousseff on trial for breaking budget laws. The Senate voted in favour by 55 votes to 22.
Brazil is facing its worst recession since the 1930s and investors hope Rousseff’s replacement, vice president Michel Temer will be more business friendly, cutting the country’s massive fiscal deficit and returning the economy to growth.
The real was 0.15% firmer against the dollar on Thursday, consolidating gains of 1.5% in the week so far, while the iShares MSCI Brazil exchange traded fund edged up 0.37%. Brazil’s benchmark stock index is up 2% for the week so far.
Guillaume Tresca, senior emerging markets strategist at Credit Agricole, said the potential for further appreciation in the Brazilian real was limited in the short term after such a strong move.
“The market is really long the real, everyone is expecting the impeachment. But the road to impeachment will be very bumpy and it is a long-term process,” he said. This could lead to a sell off if there were any setbacks in the process, he warned.
Brazilian five-year credit default swaps fell two basis points from Wednesday’s close to 323 basis points (bps), according to Markit data. This was the lowest level since August 2015.
The yield premium paid by Brazilian sovereign bonds over US Treasuries on the JP Morgan EMBI Global also narrowed two bps on the day to 393 bps, the lowest level since September 2015.
The Nigerian naira weakened against the dollar in the non-deliverable forward markets, as expectations mounted that the central bank would need to devalue the currency.
One month non-deliverable forwards showed the naira trading at 207 per dollar, weakening 2.5% on the day, and the lowest since early March while three-month NDFs saw the naira slip 7.5%.
The benchmark emerging equities index was flat as a decent open in emerging Europe stock markets offset a weaker performance in Asia.
Tresca said that emerging market investors were still in “risk off” mode following last Friday’s subdued US payrolls report, which had tempered expectations for growth.
“For the last few months we’ve had a surprising EM rally and now the market is a little bit lost and looking for direction. For the next few days we could see some more profit-taking,” he said.
Philippines stocks were amongst the biggest fallers in Asia, losing almost one% as investors banked profits. The market had enjoyed two days of nearly 6% gains after a victory for tough talking Rodrigo Duterte in presidential elections earlier this week.
The peso also weakened 0.3% against the dollar, with the Philippines central bank keeping rates on hold at 4%, as expected. The bank said it expected growth to remain strong after Duterte’s win.
Chinese mainland shares edged up 0.24% but Hong Kong stocks lost 0.7% and Korean shares were down 0.13%. In emerging Europe however, markets gained, with Warsaw shares up 0.7%, Budapest up 0.5% and Istanbul up 0.6% as it continued to recoup some of last week’s losses.
Emerging currencies were also mainly firmer against the dollar with the Turkish lira up 0.2%, the South African rand up 0.6% and the Kazakhstan tenge up over one%, helped by a surge in oil prices on Wednesday.
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