(Bloomberg) -- Brazil’s central bank shocked traders by intervening in the foreign exchange market for the first time in three months, selling dollars in two surprise auctions to prop up the real after it slumped to a record low.
The currency pared losses after the second intervention and was down 0.3% on the day as of 4 p.m. in New York. It had weakened as much as 1.2% to a record 4.2765 per dollar after the first auction failed to establish a floor for the currency, which has dropped 9% this year. The central bank didn’t say how much it sold.
Policy makers’ concern that a weak real could fuel price increases in a nation with a long history of out-of-control inflation may have been the driver for the moves, which came just hours after officials had signaled they were comfortable allowing markets to set the exchange rate. Pressure on consumer prices makes it more difficult for the central bank to cut borrowing costs to boost economic growth.
“Pretty ironic of the central bank to jump back in the market,” said Alvise Marino, a currency strategist at Credit Suisse (SIX:CSGN) in New York, who has been bearish on the real since September. He said authorities may have been driven to act by the severity of the recent drop, rather than the specific level. The real is down 5.5% this month.
Economy Minister Paulo Guedes said Monday that a weaker real isn’t a problem -- in line with comments last week by central bank chief Roberto Campos Neto. Tuesday morning, President Jair Bolsonaro said he’d like a stronger real, but signaled he would defer to his finance chief.
Marino said while the intervention might provide some short-term support, the real has further room to weaken given the state of the economy and investors’ concern about regional stability. The ongoing political turmoil in Latin America, the lower carry-trade appeal and the fact that the real is being used by investors as a hedge for long positions in equities and other local assets will keep pressuring the currency, he said.
“There’s some spillover from what’s been going on in Chile and now Colombia,” said Brendan McKenna, a currency strategist at Wells Fargo (NYSE:WFC) in New York, referring to widespread protests across the region.
The real’s recent slide has put a cap on predictions for more cuts to the benchmark Selic rate. In December, the central bank is expected to deliver its fourth straight reduction of 50 basis points, which would lower borrowing costs to a fresh record of 4.5%. Brazil’s swap rate traders have trimmed bets on a February rate cut that would take the rate to 4%.
The new reality of low Brazil rates -- just three years ago the Selic stood at 14% -- has eroded the appeal of using the real for a carry trade, in which investors borrow in dollars and invest the money in higher yielding currencies.
Campos Neto has said that the weaker exchange rate has coincided with an improvement in Brazil’s perceived risk -- which investors interpreted as a signal that there wasn’t any plan to intervene to stop its slide.
But intervention often works best when it’s unexpected, so policy makers may have seen value in keeping their plans secret. And there’s precedent from earlier this year for doing that.
The last time Brazil intervened, on Aug. 27, it came minutes after Campos Neto said policy makers would only act when there is a liquidity gap. There wasn’t an obvious issue with liquidity today, with the real’s decline in line with the performance of other emerging-market currencies.
(Updates chart and prices in second and fourth paragraphs)
