Brazil: Real slumps to fresh historic low in mid-March; depreciation shows no sign of abating
The Brazilian real continued to plunge in March, topping the list as the worst-performing currency so far this year. The real hit a new all-time low of BRL 4.86 per USD on 13 March, marking a 10.5% depreciation over the prior month. Moreover, the currency was down 21.5% year-on-year and 17.3% year-to-date. Although the Central Bank stepped in on 9 March to relieve pressures on the currency, the real continued to tumble despite the Bank’s efforts.
Pressure on the already-weak real intensified in March. A stark increase in market risk aversion linked to the coronavirus pandemic has tightened global financial conditions, sending Brazilian stocks into a tailspin. Meanwhile, the recent plunge in global crude oil prices—after Saudi Arabia and Russia entered a price discounting war—is weighing on commodity markets and exacerbating the real’s decline.
Consequently, the Central Bank ramped up its interventions in FX markets, selling USD 3 billion in the spot currency market on 9 March in a bid to prop up the currency, which came on the heels of several auctions in recent weeks to the tune of about USD 10 billion. Furthermore, Monetary Policy Director Bruno Serra stated the Bank would continue to intervene as much as necessary to support the BRL, noting the Bank’s foreign reserves were robust enough to withstand additional measures.
Despite the currency’s persistent weakness, panelists now largely expect the Central Bank to cut rates at the 17–18 March monetary policy meeting, following suit of leading central banks such as the U.S. Federal Reserve—which cut rates 100 basis points on 15 March. Market expectations of another rate cut have further undermined the real’s attractiveness.
Looking ahead, the real’s position is likely to remain fragile as long as the coronavirus outbreak continues to rock financial markets and global growth prospects. Domestically, record-low interest rates and a widening current account deficit will also weigh on the BRL, while stalled reform efforts could cause volatility. The currency should recover somewhat, however, in the second half of the year, supported by stronger economic activity, ongoing fiscal discipline and the reform agenda.
Commenting on the outlook for the real, economists Carlos Carranza and Gisela R. Brant at JPMorgan noted:
“Brazil’s market-friendly economic agenda seems on the back seat given the broader global backdrop. Even with the BCB autonomy bill, the tax reform and the administrative reforms moving forward in the agenda, global events are likely to overshadow the local narrative.”