Brazil's Real Is in Free FallBy and
Two rounds of extraordinary support haven’t been enough
Real is among world’s worst-performing currencies this quarter
Brazil’s real is proving immune to intervention from the central bank this week, adding pressure on policy makers to find new ways to support the currency.
The real, already the worst performer among peers this quarter, tumbled as much as 2.4 percent in a third day of sharp declines even after policy makers sold an additional $2 billion of foreign-exchange swap contracts Thursday, marking the second time this week it’s gone beyond its usual daily offer of $750 million. It traded at 3.9468 per dollar as of 1:29 p.m. in New York, the lowest since 2016. Stocks in Brazil also plunged.
Traders speculate that the central bank could further increase swaps auctions, sell dollars into the spot market directly or raise interest rates to show their commitment to avoiding a disorderly rout. Counterparts in Argentina, Turkey, India and Indonesia have moved in recent weeks to shore up confidence in their currencies and halt capital flight by raising borrowing costs.
“Incremental intervention isn’t really doing the trick here, so the risk of a more aggressive policy response has to increase," said Mike Moran, the chief economist for the Americas at Standard Chartered.
Brazilian policy makers have remained mum since Tuesday, when their first offer to sell extra swaps provided only momentary relief for the currency. In the minutes to its latest rate-setting meeting last month, when policy makers decided to hold the benchmark rate at a record low 6.5 percent, the bank said its monetary policy is guided by inflation expectations, economic activity, and the balance of risks. Currency moves, which the central bank calls relative price changes, are considered only for their secondary effects.
On Thursday, Finance Minister Eduardo Guardia told reporters in Brasilia that the government was acting "in a coordinated and joint manner to reduce market volatility, which is our role." When asked if a speculative attack is taking place in Brazil’s currency market, the minister said that the dollar is appreciating globally.
Indeed, it is. But the real’s 16 percent plunge against the greenback since the end of March trails only the drop in Argentina’s peso as the worst in the world.
“It is important that the central bank stays visible,” said Tania Escobedo, a currency strategist at RBC Capital Markets in New York who was the most accurate forecaster for the real in the first quarter, according to Bloomberg rankings. “We remain cautious at current levels,” she said, adding that the trend is still for a weaker real.
The real is suffering amid an increasingly bearish view of the economy. The selloff picked up steam amid a 10-day truckers’ strike that paralyzed the country last month and sidelined much of the government’s efforts to rein in a fiscal deficit. Political uncertainty ahead of presidential elections in October and rising global interest rates have only added to woes.
“Intervention can provide temporary relief and limit currency weakness but, in and of itself, is unlikely to be enough to turn weakness into strength,” said Erik Nelson, a currency strategist at Wells Fargo in New York. “To see a more sustained recovery in the Brazilian real, you’ll likely need to see a more significant shift in the market narrative around the currency.”
While the swaps don’t change the supply of physical dollars in the country, they support the real by meeting demand from investors who want to hedge against the risk of the decline in the Brazilian currency. They also boost onshore dollar loan rates, encouraging commercial banks to bring greenbacks into Brazil to profit from the higher local rates.
Economists have been slashing forecasts and now see Brazil’s economy growing about 2.2 percent this year, from a previous 3 percent, according to a survey from the central bank. JPMorgan Chase & Co. recently lowered its expansion call to a mere 1.2 percent this year.
Forecasts for the currency haven’t managed to keep up with the rout. The central bank survey still shows analysts expect the real to end the year at 3.50 per dollar. HSBC analysts changed their forecast on Thursday and now predict the real will end December at 3.9, from 3.35 previously.
— With assistance by Josue Leonel, and Felipe Saturnino