Brazil: Brazilian real posts biggest drop since September 2008
September 30, 2011
On 30 September, the Brazilian real (BRL) traded at 1.85 per USD, which represented a 14.4% nominal depreciation compared with the previous month, the biggest loss since the collapse of Lehman Brothers in September 2008. On a year-on-year basis, the real depreciated 8.6% versus the USD. The depreciation of the BRL, as well as other emerging market currencies, was triggered by mounting concerns regarding a new global economic slowdown, which led to capital flowing out of emerging markets as investors rushed to seek safer assets. The substantial weakening of the BRL triggered the Brazilian Central Bank (BCB) to intervene in the FX market and sell USD 2.75 billion of currency swaps on 22 September (when the BRL traded at 1.90 per USD) in order to boost the value of the currency. Going forward, the Brazilian currency is likely to continue to weaken, as the BCB surprisingly slashed interest rates on 31 August by 50 basis points to 12.00%. Furthermore, on 30 September, President Dilma Rousseff expressed her desire for more rate cuts, putting pressure on monetary authorities. Reduction in interest rate differentials in relation with developed countries should dampen the demand for Brazilian currency and lead to more depreciation. On a positive note, the weaker currency should make Brazil's exports more competitive in the world markets and help to narrow the current account gap, which currently stands at 2.1% of GDP.