The sharp decline in the Brazilian Real exceeded the pain threshold of the country’s financial authorities. The Central Bank of Brazil entered the foreign exchange market with interventions, selling USD from reserves to support the exchange rate.
Since the beginning of the year, the Real depreciated by 7% against the dollar and updated the historic low on the FX market on Thursday (4.3825 real to the dollar). In annual terms, the Real lost 10%, and became the worst of the 24 EM currencies . In response, the Brazilian Central Bank for the second time in the last 3 months printed out $360 billion gold reserves and began selling currency in the swap market, pumping a total of about $1 billion into the market. On Friday, operations were repeated for the same amount.
Just a week ago, Brazilian Minister of Economy Paolo Guedes assured that the Real’s weakness is not a concern, and central banker Roberto Campos Neto pointed out that despite the devaluation, inflation expectations remain normal.
“The market ‘checked’ the statements of the authorities, and they decided to intervene”, says Oxford Economics economist Filipe Camargo. The last time the Central Bank of Brazil sold from reserves in November, when the Real broke through the level of 4.20 per Dollar.
After the influx of currency from gold reserves, the real strengthened sharply: a little more than a day, the dollar exchange rate was reduced by 2% – from 4.38 to 4.29 real. However, the success of the central bank risks being short-term, analysts at Capital Economics say.
The Brazilian economy is hit by a drop in oil and raw materials prices: 20% of its exports are from hydrocarbons and the sale of iron ore abroad. The coronavirus epidemic, which collapsed the price of a barrel by 15% and metal prices by almost 10%, promises a reduction in foreign currency inflows and a “hole” in the balance of payments that is approaching $ 50 billion a year.
In 2017-19, it was able to cover it due to the influx of speculative capital into the bond market. But in 2020 it predictably dried up, analysts at Capital Economics say: the Central Bank of Brazil has been consistently lowering interest rates (from 13% in 2015 to 4.25% now), and with them the profitability of Brazilian assets is falling.
“Against the backdrop of erosion of the carry trade, the real will drop in price to 4.50 per dollar by the end of the year,” according to Capital Economics.
The $2 billion spent by the Brazilian Central Bank is “nothing,” a trader at the São Paulo Exchange told: “They were able to stop the devaluation and strengthen the real, at least today, but the foundation is still very fragile. As rates go down, growth rates (of the economy) are slowing down, the market will try to buy out the dollar. ”