Brazil: Real rallies on commodity price boom and high interest rates
April 8, 2022
The Brazilian real soared against the U.S. dollar in recent weeks, trading at 4.59 per USD on 4 April and hitting its strongest value since March 2020. On 8 April, the currency traded at BRL 4.70 per USD, which marked a 7.7% appreciation from the same day a month prior. Additionally, the real was up 18.6% year-to-date and 18.7% in year-on-year terms, making it the world’s best-performing currency this year, after having depreciated 40% over the past five years.
A commodity price boom and one of the world’s highest interest rates contributed to the real’s rally in recent weeks. Russia’s invasion of Ukraine on 24 February prompted a surge in commodity prices amid supply concerns and harsh international sanctions imposed on Russia. That said, the country’s exposure to Russian demand and supply—barring fertilizer imports—is somewhat limited, thus the impact should mainly come from second-round factors. Still, Brazil’s exports, current account and currency have benefited from soaring prices for key export commodities, like oil, sugar, soybeans and iron ore, propelling record export data in March amid high demand.
Additionally, as inflation continued to surprise on the upside in March, hitting levels not seen in decades, Brazil’s Central Bank hiked its SELIC rate by another 100 basis points at its latest meeting. The move brought the SELIC rate to 11.75%, marking the highest rate since early 2017. With its latest move, which followed an aggressive cumulative 875 basis points of rate increases since March 2021, the real interest rate landed in positive territory, despite red-hot inflation. That said, the Central Bank turned less hawkish, despite increased risks to the short-term inflationary outlook, and suggested hikes of the same magnitude—rather than its prior 150 basis point hikes—in the coming months. With interest rates at this level, the larger interest rate differential versus the U.S. and some emerging markets should make Brazil a preferred destination for investment this year.
Going forward, the currency looks set to continue its rally in the short term. However, further ahead, the real should lose ground, weighed on by the uncertain outcome of October’s elections—and the subsequent impact on policies—as well as by languid economic growth. That said, investors are growing increasingly comfortable with the idea that, whoever wins Octobers’ election—incumbent Jair Bolsonaro or front-runner Lula da Silva—they are bound to implement policies to strengthen economic growth, which would support the real.
Author: Marta Casanovas , Economist