Brazil: Brazilian real hits all-time low in September
October 9, 2015
The Brazilian real’s (BRL) downward spiral continued in recent weeks, as the currency plunged to an all-time low in September against the U.S. dollar. The downward trend that started in April 2014 has been fueled by an ongoing slew of poor economic data and growing uncertainty that the government will be unable to halt the economy’s decline. In addition, exchange rate movements in China and an anticipated tightening in the U.S. monetary policy have added to exchange market pressures. On 23 September, the real fell to 4.18 BRL per USD, which represented a sharp 15.4% depreciation over the same day of the previous month. The figure represented a 57.2% decline in value from the start of the year and a 73.2% decline in value from the same day of the previous year.
After hitting the all-time low, the real gained back some lost ground and rose to 3.85 BRL per USD on 6 October. The appreciation came on the back of rising expectations that the U.S. Federal Reserve will delay monetary policy normalization this year and a rally in commodities prices. In addition, the Central Bank of Brazil has been supporting the currency through auctions of dollar-repurchase agreements, which temporarily boost the supply of USD. The Bank has also offered auctions of currency-swap contracts. Diego W. Pereira, Emerging Markets Strategist at JPMorgan adds:
“On BRL, we are of the view that the core idiosyncratic issues driving asset valuation remain unsolved. In fact, the main drivers of instability in Brazil are the deterioration of fiscal accounts, which is entwined with political uncertainty. […] Absent a fiscal anchor, lingering political uncertainty puts the BRL at risk of experiencing another volatility event as the one transpired a couple of weeks ago.”