Brazilian Real Recovers on Dollar Weakness

Ibeth Rivero

So far this week, the Brazilian real has advanced 2.88 percent against the U.S. dollar, a strong move towards recovering from the two previous weeks' losses.

The currency's recent moves can be attributed to the relative weakness of the dollar, which has lost 1.07 percent so against its primary trading partners. The Greenback's weakness can be attributed to the surging optimism in the world markets, helped by the Fed's chairman optimistic outlook. As it is known, the dollar tends to lose value when optimism soars, since it is considered a "safe haven currency".

This week has also been a very good one in general for the emerging markets as commodity prices have surged as of lately. Brent crude futures, the a benchmark index for the oil markets, has advanced 10.86 percent so far this week, followed by copper futures which have advanced 5.30 percent.

Just like any of the rest of the emerging currencies, the Brazilian real has had a very bad year so far, losing 33.22 percent, making it the worst-performing currency of all emerging market currencies.

There may be three main factors behind this situation. The first one is Brazil's government management of the coronavirus health crisis, which has been rather poor. At the moment there are 293,357 confirmed cases in the country as well as a death toll of 18,894, making it one of the most affected countries in the world, only behind Russia and the United States.

The second reason is that the interest rates are now at a historical low. At the beginning of May, the bank set its benchmark cash rate at 3 percent, lowering it from 3.75 percent. The decision was unanimous according to the institution, which also claimed that at the moment the right policy is keeping interest rates and exchange rates low given the " very profound crisis" the country has been going through. Those were very concerning news for investors, especially because they often rely on high-interest rates to compensate for the economic and political instability.

The third reason, which is heavily influenced by the two previous ones, is the huge capital outflows the country has been suffering. Brazil has recently had to lower its reserves by US 23 billion to counter a capital outflow of the same amount. The central bank President Roberto Campos Neto said that the central bank is willing to intervene on the foreign exchange markets if necessary, claiming that the country has a lot of reserves.

The International Monetary Fund (IMF) expects the country's economy to contract by 5.3 percent, which is a trend that practically all Latin American countries will follow. This situation has made several developing countries to resort to multilateral institutions to arrange funding for their stimulus packages. Analysts at Deutsche Bank expect Brazil to spend around 30 percent of its gross domestic product on deficit spending and liquidity injections in the financial markets, so the possibility of having to ask for help from the external institutions cannot be discarded at the moment.

Brazil's economy ministry recently claimed that the government is ready to extend some emergency measures if it's necessary but that none of those measures include fresh spending.

“There is no money for that,” explained an official of the economy ministry, “When the pandemic is over, our debt will be more than 90% of GDP. We have to show that debt-to-GDP is falling. If not, no one will come here. Who is going to a country where debt is rising?” he added.

Some analysts expect that the real will keep depreciating in the long run, given the poor response of the Brazilian government to the coronavirus crisis.

"The continued rapid spread of the coronavirus through Brazil means that the economy will pull out of its slump more slowly than in many other emerging markets," explained an analyst at Capital Economics, "And with the crisis challenging the government's stability, the risks are skewed towards further falls in the real over the next few months," he added.

About the Author
Ibeth Rivero

Ibeth contributes daily market commentary in both English and Spanish (both of which she speaks fluently) and she also manages the DailyForex mobile app to ensure that traders around the world are getting important market updates in real time.

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