Brazil: Real hits fresh record low amid rising Covid-19 cases and heightened political tensions
The Brazilian real lost further ground against the U.S. dollar in May as coronavirus-induced turmoil and political tensions weighed on the currency. On 12 May, the real dived to a new record low of BRL 5.89 per USD and fluctuated around that level in the following days. On 15 May, it traded at BRL 5.86 per USD, which marked a 10.6% depreciation over the previous month. Furthermore, the currency was down 31.7% year-on-year and 31.4% year-to-date.
Pressure on the real intensified in May as Brazil is starting to see a sharp increase in the number of confirmed coronavirus cases and as weak economic data showed that the economy is already being debilitated by the pandemic. The authorities have cut both their GDP and inflation forecasts for this year due to the fallout from the Covid-19 pandemic. They now see GDP contracting 4.7%, down from their previous zero growth projection, while they lowered their inflation outlook from 3.1% to 1.8%. Meanwhile, the Central Bank’s increasingly dovish stance—which saw the SELIC rate cut to a historic low of 3.00% at its latest meeting on 6 May—further undermines the currency’s attractiveness. Exacerbating matters, an uncoordinated policy response to the virus outbreak and tensions between different branches of the government have added to investor nervousness, aggravating capital outflows.
Looking ahead, panelists see the real remaining very weak for the remainder of the year. The coronavirus health crisis and its impact on the economy, coupled with feeble global demand for Brazilian commodities, are set to weigh on the currency. Moreover, expectations of additional monetary policy easing and potential quantitative easing—following the lower house’s decision to grant the Central Bank permission to undertake bond buying activities—could add further downward pressure.