Brazil: Brazilian real weakens in August
August 31, 2011
On 31 August, the Brazilian real (BRL) traded at 1.59 per USD, which represented a 2.0% nominal depreciation compared with the previous month. On a year-on-year basis, the real appreciated 10.6% nominally versus the USD. On a year-to-date basis, the real has appreciated 5.0% versus the USD. On 31 August, the Brazilian Central Bank (BCB) cut interest rates by 50 basis points to 12.00%. The move helped reduce interest rate differentials that have triggered a large inflow of foreign capital into the country. However, even after the rate cut, Brazilian rates remain attractive for foreign investors and the real is likely to resume its appreciation trend in the months ahead. That said, several factors are likely to slow the pace of the appreciation of the Brazilian real. First, higher inflation and heightened uncertainty regarding future inflation path after the recent Central Bank's decision to cut interest rates should result in lower demand for the Brazilian currency and thus translate into a weaker BRL. Moreover, recently, Brazilian authorities introduced several measures to stem the appreciation of the real, including a 1% tax on derivatives transactions, a higher ceiling on reserve requirements on short USD positions and the so-called financial operations tax (IOF, Imposto sobre Operac?es Financeiras). These measures did not yet have the desired effect but should help ease the upside pressure on the real in the months ahead.