Brazil's real ends six-day slump; Petrobras sinks Bovespa

Brazilian financial markets swung widely on Friday as investors digested disappointing corporate results, central bank currency intervention, US labor data and political turbulence. The Brazilian real rose for the first time after a six-session slump that saw the currency weaken 6 percent against the dollar. Brazil's Bovespa stock index dropped its most in over two weeks, led by sharp decline in shares of state-run oil producer Petroleo Brasileiro SA, known as Petrobras.
The real fluctuated in early trading before settling into positive territory in the afternoon. Late on Thursday the central bank stepped up its currency intervention program by nearly doubling the number of currency swap contracts it offers on a daily basis. The real has weakened nearly 25 percent against the dollar this year due to lower global commodities prices, the outlook for higher interest rates in the United States, economic decline and higher political risk.
The swaps are derivatives that support the real by providing investors with protection against currency losses. Meanwhile, yields on Brazilian interest rate futures shot higher across the curve after data on Friday showed 12-month trailing inflation rose more than expected in July, to the highest level in nearly 12 years. Traders said the recent string of disappointing economic data is throwing cold water on hopes for an economic recovery in 2016.
The Bovespa fell to its lowest level in two weeks, mostly on a 5 percent fall in Petrobras preferred shares. Late on Thursday the company reported an 89 percent plunge in second-quarter net income and an unexpected 1.6 billion real ($454.55 million) charge to resolve a federal tax issue. Investors also kept their eye on the outlook for higher interest rates in the US after encouraging payrolls data kept the door open for a potential interest rate hike in September.
Higher interest rates in the US are expected to drag on the most widely-traded Brazilian stocks, which tend to attract a large share of foreign investors. Also underlying moves across Brazilian asset classes was a media report that Vice President Michel Temer would no longer handle President Dilma Rousseff's relations with her allies in Congress. While Temer later denied the report, investors remain wary of the possibility that political infighting will knock Brazil's fiscal adjustment off course and lead to a sovereign credit downgrade.