Brazil: Real strengthens markedly in December amid higher risk appetite
The Brazilian real posted strong gains against the U.S. dollar over the past month, largely owing to positive Covid-19 vaccine developments, Joe Biden’s win in the U.S. presidential elections and continued upbeat domestic economic data. On 3 December, the real hit an over four-month high of 5.15 BRL per USD, before trading at BRL 5.16 per USD on 4 December, which marked a 9.9% appreciation over the previous month. Despite this upturn, the real was still down 18.4% year-on-year and 22.0% year-to-date.
The currency was primarily buoyed in recent weeks by higher risk appetite for emerging-market assets amid positive results from several Covid-19 vaccine trials, improving expectations of a gradual return to normalcy for the global economy. Moreover, Joe Biden’s win in the U.S. presidential elections increased hopes of a more stable U.S. foreign policy stance, further lifting market sentiment. Furthermore, positive economic data for the third quarter, with GDP rebounding at a record-breaking pace, provided an additional boost to the currency, as it underscored the continued economic recovery.
Looking ahead, the real is projected to continue appreciating heading into 2021 as economic activity recovers from the Covid-19-induced slump. Uncertainty over fiscal accounts and debt sustainability poses a downside risk, however.