Brazil: Real plunges to new record low in February
February 10, 2020
On 7 February, the Brazilian real fell to a fresh record low against the U.S. dollar, ending the day at 4.32 per USD, which marked a 6.2 depreciation over the same day in January. The currency has weakened notably in the first quarter of the year, and was down 7.5% year-on-year and 16.3% year-to-date.
The real came under pressure in February amid growing alarm over the outbreak of the new coronavirus in China and its subsequent spread elsewhere, which has sharply curbed investor appetite for emerging market assets. Declared as a global health emergency by the World Health Organization, the outbreak has sparked a flight to safe-haven assets over fears of the implications for the world’s second largest economy and supply chains at large. The outbreak has also hit commodity prices, which added to the real’s slide. The real’s attractiveness was further undermined by domestic pressures, as the Central Bank cut the benchmark rate to a new historic low at its 4–5 February meeting, while investors warily eye whether President Bolsonaro’s government will follow through on policy reforms.
Despite the currency’s slide so far this year, the Bank has yet to intervene to curb the depreciation after its last intervention in late November.
Looking ahead, the real is expected to remain weak but should recover some losses before year-end, supported by stronger economic activity, ongoing fiscal discipline and the reform agenda. Conversely, record-low interest rates and a worsening trade balance could weigh on the BRL, while political developments and/or stalled reform efforts could cause volatility.
Commenting on the real’s trajectory going forward, Gustavo Rangel, chief LATAM economist at ING, noted:
“The extraordinary amount of FX outflows seen in recent months continues to show no sign of abating […] Overall, it’s unclear how long and how persistent these outflows will be but, for us, a more supportive BRL environment depends on the eventual confirmation that the monetary easing cycle has been concluded (with no additional policy rate cuts) and, more importantly, stronger evidence that an activity recovery is firmly under way.”
Author: Lindsey Ice, Economist