Brazil's real underperforms US dollar despite rate hike by central bank
A rate hike by the Brazilian central bank was not enough to stabilise the country’s currency which continues to underperform against the US dollar.
On Wednesday, the country’s central bank raised interest rates by 50 basis points to 12.75% from 12.25% in a bid to prevent a further depreciation of the country's currency, the Real, which has been plagued by Brazil’s struggling economy and political plight.
The currency reached its weakest level of 3.001 for the first time since August 2004 in midday trading Thursday as these concerns forced traders to buy the dollar.
By Friday, the currency changed hands at 3.0611. The Real has lost nearly 12% of its value against the greenback since January, making it the worst performing major emerging market currency so far this year.
Concerns are now mounting that the underperformance of the Real against the US dollar means realignment between the two currencies has taken place, which means there is little difference between relative prices in Brazil and the US.
The Real’s depreciation against the US dollar comes as Brazilian president Dilma Rousseff attempts to revive the country's economy that’s been hit by slowing growth with trading surplus swinging into a deficit in recent years.
According to analysts, Brazil’s beleaguered economy is expected to contract in 2015 as the government raises taxes and cuts spending. The implementation of austerity in Brazil is widely seen as supportive for global risk sentiment as the country attempts to rebalance itself.
Indeed, FX strategists at Barclays note that risk sentiment favours emerging markets, as cross-market volatility recedes and the European Central Bank’s new stimulus programme should provide a helpful backdrop for capital flows into EM.
“With a Fed hike around the corner and an ECB getting ready to make its asset purchases, we believe either EM borrowers will increasingly fund their foreign currency borrowings out of the EUR instead of the USD or become more reliant on domestic credit,” said Barclays.