The fall brings the real’s decline against the dollar this year to 31%, cementing its status as one of the worst-performing currencies against the greenback so far this year.
The central bank slashed its benchmark Selic rate by 75 basis points to a record-low 3.00% and indicated it could repeat the dose at its next meeting, as it battles the deepening economic crisis fueled by the coronavirus pandemic.
Analysts expressed surprise that the central bank’s statement made no reference to the exchange rate, given the real’s steep decline this year. The forward guidance of another chunky rate cut, even though it might be the last in the cycle, intensified the selling pressure on Thursday, they added.
“We see significant upside to our dollar/real forecast,” Barclays analysts wrote in a note. “In our view, the central bank is taking excessive risks amid heightened fiscal and political uncertainties,” they added.
The real traded as low as 5.8415 per dollar on Thursday, down more than 2% on the day and bringing its year-to-date losses so far to 31%.
Economy Ministry officials, including minister Paulo Guedes, have repeatedly said they are comfortable with a monetary policy mix of low interest rates and weak exchange rate, the opposite of what Brazil had experienced for many years.
The central bank has intervened selling dollars several times this year, often in large amounts, to relieve pressure on the real and ease market stress. But policymakers have made it clear they are not doing so to set a level for the currency.
Market participants say that as long as that policy framework is in place, the real will continue to weaken and market strains will continue to build.
Interest rate spreads widened sharply on Thursday, reflecting the prospect of more policy easing but growing risks of capital outflows, market volatility and deteriorating investor sentiment stemming from the weak currency.
The January 2021-January 2029 interest rate futures spread widened nearly 40 basis points to 560 basis points .
“The central bank’s credibility is being eroded. This is bad,” said a senior trader at a bank in Sao Paulo. (Reporting by Jamie McGeever Editing by Bernadette Baum)
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