Brazil: Real loses value amid turbulent political scene
The Brazilian real (BRL) sunk in value against the U.S. dollar in April amid a wave of political noise in the country. On 13 April, the real closed the day at 3.42 BRL per USD, which represented a 5.0% depreciation over the same day of the previous month and marked its lowest value since December 2016. As of that date, the real had lost 3.3% of its value year-to-date and had fallen 8.8% compared to the same day last year.
A mix of political developments and lackluster economic data have combined to push the real lower. On the political front, the scene has been volatile, with a wide-open election race running up to October’s vote. While former President Luiz Inácio Lula da Silva has been barred from running due to corruption charges, which should calm investors’ nerves, political uncertainty remains high among a crowded field of candidates, and it remains to be seen if a market-friendly president will prevail, adding pressure on the real. Furthermore, the economy badly needs reforms to correct fiscal imbalances, and measures have fallen to the wayside in the run up to the vote. On 6 April, Finance Minister Henrique Meirelles stepped down as he weighs a presidential bid. According to Brazilian law, cabinet members must resign by 7 April to run in the October vote, and a wave of resignations had been expected. The focus on politics in the coming months will likely translate into few policy changes.
A slew of subdued economic data has also provided little support for the real. Incoming indicators for the first quarter point to a moderate and bumpy recovery, with industrial production and retail sales data seesawing. Moreover, the Central Bank’s aggressive easing cycle combined with rising interest rates in the United States has also led to a lower interest rate differential between the two countries, erasing some support for the real. Finally, heightened global uncertainty due to geopolitical events has caused emerging market currencies, including the real, to come under pressure.