Brazil: Brazilian real weakens to lowest level in four years
June 12, 2013
By 12 June, the Brazilian real (BRL) traded at 2.13 per USD, which was 6.2% weaker than the level registered at the same day of the previous month. Moreover, the figure follows on a 7.0% drop recorded in the month of May. In fact, the BRL's value against the U.S. dollar has now fallen to its lowest level since May 2009. On a year-to-date basis, the real has lost 4.1% versus the USD.
Weak economic fundamentals are likely the key reason for the weak performance of the Brazilian currency, which has been on a downward trend since mid 2011. In the first quarter, GDP grew 0.6% over the previous quarter in seasonally adjusted terms, which was below market expectations. Meanwhile, on 6 June, rating agency Standard & Poor's reaffirmed Brazil's BBB credit rating, but lowered its outlook to negative, citing sluggish economic growth, weakening fiscal position and a loss of credibility with investors. In addition, the real has been negatively affected by the recent speculation that the U.S. Federal Reserve may start tapering QE soon.
In order to prop up the real, on both 10 and 11 June, the Central Bank sold a total of USD 2.3 billion of currency swaps. Meanwhile, on 4 June, the Brazilian government scrapped the so-called financial operations tax (IOF, Imposto sobre Operacoes Financeiras) on foreign purchases of fixed income instruments. The removal of the 6% tax aims to attract more capital flows, simultaneously boosting the currency and increasing liquidity in the market. More recently, on 12 June, the government also reduced a financial transactions tax on currency derivatives to 0%.
FocusEconomics Consensus Forecast panellists expect the real to trade at 2.04 per USD by the end of this year. For 2014, the panel projects the real to trade at 2.09 per USD.