Currency News: Brazilian Real Weakens

Currency News

The Real, Brazil’s currency, falls in value when compared to  its major global peers. This is due to the central bank’s efforts to weaken the currency overshadowed the Senate’s decision to suspend President Dilma Rousseff from office amid a widening corruption scandal.

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The Brazilian government has been in turmoil as of late as as Ms Rousseff is facing trial after the Senate on Thursday voted to impeach and suspend her. She is accused of illegally hiding a growing public deficit ahead of her re-election in 2014, through use of conniving financial tools. She denies the charges. Michel Temer became interim president as soon as Ms Rousseff was suspended.

Confidence among investors has fallen in the Brazilian economy as the country’s deep recession and a vast corruption scandal at state-backed oil company Petrobras. Earlier this year Ms Rousseff, helped fuel a rally that made the real the best performing major currency against the dollar this year. It dropped 1.1 per cent to 3.49 against the dollar after the vote, though remains up more than 13 per cent this year.

The Real was also boosted, prior to the impeachment, due to the fall in the US dollar.  Much of the real’s drop came in the first quarter, and while there have been some sharp declines triggered by political uncertainty, the real is trading at the same level as at mid-April.

The Brazil market was in a boom as the impeachment neared, as demonstrated by the boom in the country’s equity market. But David Rees at Capital Economics said investors “may have got ahead of themselves to some degree”.

“The upshot is that we still expect the Bovespa to end this year only a little higher at around 55,000 (from about 53,000 currently), while we would not be surprised to see the real weaken a little towards R4 (from around R3.50),” Mr Rees wrote in a note.

The Bovespa, which had advanced more than a fifth this year, dropped 0.3 per cent.

Banking giants, Goldman Sachs, said it was taking a neutral stance on the real, noting a sharp narrowing in Brazil’s current account deficit which in other cases tends to point towards stable currency performance, lower inflation and rate cuts.

Goldman noted how the Real has been overvalued in recent years, and a weakening of the real will actually benefit the economy and in turn improve the countries current account.

It added: “We recognise the risk of a near-term overshoot to stronger levels on political dynamics, but executing a credible fiscal plan will be a challenge for any administration.”

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