Brazil: Real gains notable ground in May
May 14, 2021
The Brazilian real posted strong gains against the U.S. dollar in recent weeks, chiefly reflecting the hawkish tone struck by the Central Bank in its May meeting and rallying prices for iron ore—one of the country’s top exports. On 11 May, the real hit a near four-month high of 5.22 BRL per USD, before weakening slightly and trading at BRL 5.27 per USD on 14 May, which marked an 7.2% appreciation over the previous month. While the currency was up 10.2% year-on-year, it was down 1.5% year-to-date.
The recent strengthening of the real was largely driven by the Central Bank’s decision to hike the benchmark SELIC rate by a further 75 basis points in its May meeting—after hiking it for the first time in over five years in March—while it promised another tightening of the same magnitude in the next meeting, against a backdrop of intensifying inflationary pressures. Moreover, surging metal prices, particularly for key export iron ore, amid stronger demand in China further buoyed the real. Meanwhile, a slight decrease in new Covid-19 cases in Brazil recently and an uptick in the vaccination rate improved market sentiment and provided an additional boost to the currency.
Looking ahead, while the real is projected to weaken somewhat from its current high levels, it is seen ending 2021 at a stronger level against the greenback than its end-2020 price as the economic recovery gains traction. That said, lingering uncertainty over the reform agenda and frail public accounts, as well as the course of the pandemic, could weigh on the currency ahead.
Author: Hanna Andersson, Economist