Brazilian real collapsed: what is happening?

Brazilian real collapsed: what is happening?

USD/BRL rose to the highest level since March 2016. The selloff of Brazilian real has been very intense during the last 3 months.

Brazilian central bank keeps trying to stop the real’s fall by selling USD swaps. It announced that it had sold 40,000 contracts for a nominal value of $2 billion. However, so far, its interventions were unsuccessful.   

What are we to blame for the fall of the real? The first reason is the general strength of the US dollar against the emerging-market currencies. Increase in volatility and risk aversion of Forex traders add to the picture.

Another negative factor for the real is the rising political uncertainty in Brazil. The nation’s truckers are on a nationwide strike over fuel prices since the end of last week. Earlier, striking truck drivers blockaded roads so that the president Michel Temer ordered army and federal police to clear the blocked highways. Brazilian authorities also had to cut the price of diesel to calm down protestants. Still, it’s clear that the confidence in the current administration declined. Investors are now concerned because it’s likely that whoever wins presidential elections in October won’t conduct the painful but necessary fiscal reforms.

Add Brazil’s shaky economic growth to the picture and you’ll understand that the medium-term and the long-term outlook for the Brazilian real is negative.

Central banks of Argentina, Turkey, and Indonesia have recently increased interest rates to combat the freefall of their national currencies. Brazil’s central bank left rates unchanged for the first time in 19 months in May. The regulator didn’t raise rates as it’s worried about the global economic risks and how they may affect Brazilian economy.

Making a forecast, we can see that the real will remain under pressure. Given the economic and political troubles, it won’t be able to show sustainable strength ahead of the elections. As a result, only short-term corrections will be possible.

For USD/BRL the important levels lie at the psychological mark of R$4.00 and the all-time high at R$4.25. There’s still scope for the pair to go there. Support is at R$3.80 and R$3.77.

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