Brazil’s Central Bank Is Propping Up the World’s Worst Currency
Brazil’s Central Bank Is Propping Up the World’s Worst Currency
(Bloomberg) -- Brazil’s central bank came to the rescue of its beleaguered currency for the second time on Monday, hours after pledging to continue intervening in the foreign exchange market with all instruments available and for as long as needed.
The currency trimmed losses after the central bank sold another $465 million in the spot market. It had already sold $3 billion earlier in the first such intervention this year.
This morning, the bank’s Monetary Policy Director Bruno Serra refrained from announcing a program to systematically sell dollars from Brazil’s foreign reserves, but said this doesn’t mean the central bank is stepping out of the market any time soon.
“We will intervene for as long as needed,” he said at a Bloomberg event in Sao Paulo, pledging to use all tools in the necessary amounts whenever it deems the foreign exchange market dysfunctional.
The real slid 2.3% as of 3:30 p.m. in Sao Paulo. This morning, the currency sank more than 3.5% to a fresh record of 4.7910 per dollar even after the central bank sold $3 billion in a spot dollar auction. It was three times the amount it had initially announced on Friday, when the currency was weakening on bets the central bank would further cut interest rates to shield the economy against the impact of the coronavirus epidemic.
Pressure on the real mounted on Monday after oil prices collapsed on international markets. The currency has lost more than 15% against the U.S. dollar so far this year, making it the worst performing in the world and leading Economy Minister Paulo Guedes to call for serenity.
“The new Brazil has lower interest rates and a weaker currency,” he said.
Before Monday, the central bank had been stepping into the foreign exchange markets only via swap auctions, of which it sold $9.5 billion in the past month in a bid to contain the volatility.
Rate Cut
Disappointing economic figures and declining forecasts for growth this year are also weighing on Brazilian assets -- especially the real, which is often used as hedge for long positions in stocks and rates.
The central bank signaled last Tuesday it will likely cut borrowing costs in its March 18 meeting, resuming the easing cycle markets had thought was over. The statement put extra pressure on the currency and led traders to fully price in a quarter-point rate cut.
Serra played down the idea of an emergency cut, saying the best place to decide on monetary policy is the central bank’s rate-setting meeting. Policy makers have other instruments available, he said, including mandatory reserve requirements and prudential regulation.
--With assistance from Felipe Marques and Aline Oyamada.
To contact the reporter on this story: Julia Leite in Sao Paulo at jleite3@bloomberg.net
To contact the editors responsible for this story: Daniel Cancel at dcancel@bloomberg.net, Walter Brandimarte
©2020 Bloomberg L.P.