Brazil’s real posted a record low close against the dollar for a second straight day on Wednesday, after earlier sliding to within less than one centavo of its weakest-ever level as the weight of selling pressure built up on several fronts.
Traders cited the central bank’s apparent reluctance to repeat last week’s intervention to ease the pressure, the deteriorating economic outlook, diminishing interest rate and yield support, and market speculation about the future of Economy Minister Paulo Guedes.
The U.S. dollar closed at 4.3650 reais, having earlier reached 4.3770 reais, within one centavo of last week’s record high 4.3830 that prompted the central bank’s US$ 2 billion intervention in the swaps market.
Traders said comments on from central bank officials weighed on the real. The bank’s president, Roberto Campos Neto, said the bank will intervene again to address illiquidity, excessive market moves or currency weakness fueling inflation expectations, but also stressed that the real has a free-floating exchange rate.
Meanwhile, the central bank’s economic policy director, Fabio Kanczuk, was reported as saying the real “goes where it goes” and that the central bank only acts if there are problems with market functioning.
“Overall, the messaging of the central bank may well make this intervention (last week) less supportive than past intervention episodes,” Citi strategists wrote in a note on Wednesday.
If officials cite market volatility as a reason to intervene, their inaction on Wednesday was justified. Three-month dollar/real implied volatility fell to 9.78% from more than 10% on Tuesday, the lowest in three weeks and the biggest fall in a month.
Some traders also said President Jair Bolsonaro’s public backing on Tuesday for Guedes, who was forced to apologize recently for likening public-sector workers to “parasites,” may not have been as robust as it could have been.
Political consultancy Arko Advice said the chances of Guedes leaving his post are “remote” but added there are persistent rumblings of division between Guedes and Bolsonaro over the economic reform process.
All this comes against a steady deterioration in the growth outlook, with many economists cutting their 2020 forecasts to around 2.0% due to the coronavirus outbreak in China, Brazil’s largest trading partner.
With 2020 inflation expectations falling further below the central bank’s 4.0% goal, market-based interest rates are coming down too, even though most economists still think it unlikely the central bank will cut its benchmark Selic rate again.