Currency Movements of the Brazilian Real

September 27, 2015

By: Eric Basciano

A quick history:

Over the last 12months, the United States dollar (the USD) has strengthened more than 65% against the Brazilian real (the BRL). As a reference, the USD strengthened a relatively small 21% against the CAD over the same 12month period. In terms of actual values, 1 year ago the USD was worth 2.43 BRL, whereas today the USD is worth 3.99 BRL. Interestingly, over the last two weeks, the BRL moved from 3.83 per USD on September 16th to 4.178 on September 23rd – an appreciation of the USD by 6.3% in 8 days, an absurdly large movement in the FX markets. The BRL then made another major move against the USD over the last two days, going from 4.178 on September 23rd to its current value of 3.9486 on September 25th – a depreciation of the USD against the BRL of 5.5% in only 2 days (and a relative strengthening of the BRL).

What is causing this volatility?

The major weakness in the BRL started in February 2015, with the BRL weakening from 2.58 to around 3 BRL per dollar by April 2015. The BRL was steady around 3.0 per dollar until July 2015 when the currency started to weaken from 3.0 to 3.99 per dollar that it is at today. The rout in the BRL is a symptom of several underlying economic and political issues.

The Real has been hit by a few negative headwinds in recent months:

  • The economy is in a recession. The economy has been negatively impacted by the decline in commodity prices due to the slowing Chinese economy.
  • The Brazilian central bank is forecasting a 2.7% shrink of the country’s economy this year
  • Unemployment has increased for the past 8 months, hitting 7.6%, as at August
  • The countries 8% budget deficit is leading to inflation, which is increasing interest rates and making it hard for policy makers to combat a recession.
  • The Brazilian economy is seeing both recessionary and inflationary pressures, and these both would put pressure on the BRL
  • The country political system is in turmoil as the president, Dilma Rousseff, has been fighting off impeachment demands over a few main issues:
  • Her handling of the Brazilian recession & the country’s economy
  • The S&P credit downgrade of Brazilian government bonds, and the possibility of downgrades from other rating agencies
  • The corruption scandal at the government run oil company (Petrobras)
  • The political uncertainty puts a question mark over the required leadership to solve the country’s economic problems, obviously putting downward pressure on the currency.

Yesterday’s Currency Movement

Yesterday’s strengthening of the real was due to an announcement from the Brazilian central bank president Alexandre Tombini. Tombini announced that the central bank would do anything it can do stabilize the Real – including using his $371 billion foreign currency reserve. The announcement helped the currency to bounce back from its lows, and contributed to the appreciation against the USD over the last few days. In my opinion, the outlook for the Real in the near-term is bullish given the government intervention into the FX markets. However, using the country’s currency reserve to prop-up the Real’s value is a relative short-term solution given the finite amount of available reserves. In the long-term, the outlook for the Real is bearish unless the country can solve its underlying economic and political issues.

DeGroote on Facebook DeGroote on Twitter WMA LinkedIn