Lula Signals Openness to Spending Cuts, Boosting Brazilian Real

(Bloomberg) -- Brazil President Luiz Inacio Lula da Silva signaled an openness to spending cuts, causing swap rates to trim an upward move and the real to rebound from earlier losses.

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The nation’s benchmark stock index also extended gains, touching session highs, after the leftist leader said there is “always room to cut spending” during a Thursday afternoon radio interview.

“Brazil has too many subsidies and tax exemptions,” he added.

The comments brought some relief to local markets amid ongoing concerns about Brazil’s fiscal situation, including worries about Lula’s willingness to agree to spending reductions in order to help Finance Minister Fernando Haddad hit budget targets.

“The improvement in assets was related to Lula’s speech on subsidies,” according to Pedro Serra, an analyst at Ativa Investimentos.

Earlier in the day, Lula warned investors that they would lose money if they keep betting against the real, which ranks among the world’s worst-performing currencies this year.

He was annoyed at media reports that connected the real’s weakening on Wednesday to comments he made about the country’s fiscal outlook.

“Yesterday, the headline was that the dollar rose due to Lula’s interview,” he said in a speech Thursday. “Whoever is betting on derivatives will lose money in this country. People can’t bet on the strengthening of the dollar and the weakening of the real.”

The real has accumulated losses of over 12% this year, falling to its weakest level since 2022. Local funds have trimmed most of their bullish bets on the currency as their perception of fiscal risks has worsened.

Brazilian funds now hold a $4 billion long position on the real, used to bet on the currency’s strengthening. That’s down from $17.5 billion in January, according to B3 data on foreign-exchange derivatives compiled by Bloomberg.

“Markets are hypersensitive, but it seems that Lula felt” the real’s depreciation Wednesday, said Rafael Ihara, chief economist at Meraki Capital. “Him saying that there is room for spending cuts has helped to improve assets now.”

--With assistance from Leda Alvim, Raphael Almeida Dos Santos and Barbara Nascimento.

(Recasts lead with Lula comments about spending cuts and market reaction)

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