The market is sending a clear message to Brazil - we have you firmly in our sights and we are not convinced by your central bank’s market intervention efforts.
Another sell-off in the Brazilian real took the currency above BRL3.90, a new two-year low. That represents a fall of 1.5 per cent against the dollar in Thursday trading, meaning the real has dropped by 4 per cent in two days, and by 15 per cent since the start of the quarter.
Brazil’s central bank responded just as it did on Tuesday - by offering an extra slug of contracts in FX swaps in an attempt to stop the slide. But that first intervention failed and this latest move looks like having only limited effect.
The central bank announced it had sold 40,000 contracts for a nominal value of $2bn. Although the real recovered some of its earlier losses, it soon resumed its downward direction and remains 1.3 per cent lower on the day.
Investors have been turning negative against emerging markets in the wake of a stronger dollar, rising volatility and risk-off sentiment. Thus far, the focus of EM vulnerability has been first on Argentina, then on Turkey, causing big sell-offs in the peso and the lira.
But after both central banks raised rates (Turkey’s central bank again pushed up its main lending rate on Thursday), their currencies steadied, and attention has switched to Brazil.
The truckers’ strike, the resignation of the Petrobras chief executive and impending elections are contributing to investors’ bearish assessment.
The strike and the backlash against the local establishment appears to have benefited populist candidates for the presidency, says Rabobank, leading it to wonder whether the real could hit BRL4 against the dollar “given the current mood”.
That looks more possible by the day.
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