Brazil's real lags Latam FX as budget woes, COVID concerns mount

Brazil's real led losses across Latin American currencies on Friday as the COVID-19 pandemic raged on and the government forecast three straight years of massive budget deficits, highlighting the long road to economic normalcy.

The real fell about 0.8% in early trade, as spiking infection rates kept local hospitals stuffed. The country is the third worst hit by the pandemic in the world, after India and the United States, but has the highest daily fatalities.

Brazil's Economy Ministry projected budget shortfalls in each of the next three years of more than 100 billion reais ($18 bln), owing to continued overspending due to the pandemic.

Latin America's largest economy is also struggling with an impasses over the country's 2021 budget, which was approved by Congress last month but is being revised after it emerged it could break one of the government's key fiscal rules.

"While aid programmes are arguably necessary, owing to the continued escalation of the COVID-19 crisis, the lack of progress toward extending the measures highlights how poorly the administration is dealing with the Congress," analysts at TS Lombard wrote in a note.

"It also highlights the risk that the Congress will continue to push for more spending."

Still, the real was set for mild weekly gains, as it and most other regional currencies benefited from a second week of dollar weakness and falling US Treasury yields.

Despite the easing pressure, most emerging market currencies are still trading down for the year, as initial spikes in yields spurred large outflows from risk-exposed debt.

Latin American assets have lagged their broader peers due to a damaging second wave of infections in the region, as well as growing concerns over fiscal strength in major economies.

Chile's peso fell 0.2% on Friday but was set to outpace its peers this week as improving US and Chinese economic data pointed to a strong buildup in demand for copper, the country's top export.

Mexico's peso and Colombia's peso also strengthened this week as expectations of a demand recovery pushed up oil prices.

Latam stocks fell in early trade, with most of them set for mild weekly gains.

Among individual movers, Brazilian oil and gas firm Petrobras fell 0.6%, on reports that incoming Chief Executive Joaquim Silva e Luna has endorsed four career executives to head up key company divisions rather than bringing in more outsiders.