RIO DE JANEIRO, BRAZIL – A broad sell-off in Brazilian assets gripped the domestic market on Wednesday (8) and took its toll on the exchange rate, with the dollar surging to a 15-month high above R$5.30 as foreign and local investors dumped positions amid concerns of a heightened domestic institutional crisis and its potential impact on public accounts and economic growth.
A wave of stop losses (automatic orders to minimize losses) prompted the dollar to leave behind all of its major moving averages of 50 (R$5.1988), 100 (R$5.2142) and 200 days (R$5.3173) in one move.
A potential failure in the dollar on Thursday to return below at least the 200-day average could fuel further buying of the U.S. currency.
Throughout Wednesday afternoon, more news about truckers paralyzing federal roads added to the already sour mood after President Jair Bolsonaro’s bellicose tone in his September 7 speech in São Paulo.
The perception that the head of the Executive may be more isolated and more vulnerable to renewed pressure for impeachment also had its weight.
“We had Joesley Day, coronaday, Petroday and now BolsonaroDay,” said Alfredo Menezes, managing partner at Armor Capital, referring to days when there was sharp depreciation of Brazilian assets.
“The focus for the market now is the truckers’ movement, news of some stoppages. It would be terrible for the GDP and the fiscal front. It could be a huge blow,” he added.
The market opened with a negative reaction to Bolsonaro’s speeches the day before and the morning was spent in anticipation of statements from Federal Supreme Court Chief Justice Luiz Fux, and important figures in the Legislative branch.
DOLLAR
Fux’s speech was seen as harsh, while Chamber of Deputies president Arthur Lira said the House will work as a pacification platform between the STF and the government.
Lira refrained from talking about impeachment and pointed out that each of the Powers has its boundaries and must limit itself to its range of action.
“Bolsonaro’s incentive is to fight… And now gasoline, the dollar, inflation… all these issues have vanished (from the government’s agenda),” said the manager of a large financial institution in São Paulo, assessing that the market still has room to deteriorate before any more consistent relief.
The sharp adjustment in prices also reflects the perception that the best-case scenario now may be limited to preventing further deterioration.
“Bolsonaro has stretched the rope too far… As I see it, the government has already lost all capacity to undertake decent reforms. Now, the less it does and the less time it spends on it, the better,” said Joaquim Kokudai, manager at JPP Capital. He said cash positions (the most conservative ones) have room to increase and “that’s probably what will happen.”
“If it succeeds in maintaining the spending cap it will be great news in itself,” the manager added.
The spot dollar jumped 2.84% at closing, to R$5.3236. It is the highest daily percentage appreciation since June 24, 2020 (+3.33%), when the Covid-19 pandemic was at its peak in terms of market disruptions.
The dollar level is the highest since last August 23 (R$5.3823). The Brazilian real was by far the worst performer among major global currencies last session.
Among other domestic markets, long-term interest rates that measure the cost of money for business investments shot up 27 basis points in the evening and the main Brazilian stock index tumbled 3.78% (preliminary data), the largest drop since March 8 this year.