Brazil: Real loses some of its earlier gains in July
The Brazilian real weakened in recent weeks, losing some of the previous month’s gains, following the Central Bank’s decision to cut interest rates and due to continued Covid-19 related concerns. On 10 July, the real traded at BRL 5.32 per USD, which marked a 6.6% depreciation over the previous month. Moreover, the real was down 29.5% year-on-year and 24.5% year-to-date.
After rebounding in the previous month as containment measures across the globe started to be lifted, improving investor sentiment in turn, the real depreciated again over the past weeks largely due to the Central Bank’s decision to axe the SELIC rate to a new record low of 2.25% to shore up the economy against the fallout from the Covid-19 crisis. The Bank also hinted that there might still be room for an additional rate cut, which exerted further downward pressure on the currency. Moreover, rising numbers of coronavirus cases and increasing worries over surging infections dampened investors’ appetite for risky assets, while President Bolsonaro testing positive for Covid-19 weighed further on the real.
Going forward, although the real is projected to strengthen slightly from current levels amid a sustained positive external scenario, risks are tilted to the downside. A protracted Covid-19 health crisis, coupled with elevated public spending to mitigate its impact, will pressure the already weak fiscal accounts, which could weigh on the currency. Continued political noise poses an additional downside risk.